California watchdog announces probe on multiple digital currency lenders

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California has become the latest state to probe the troubled digital currency lending sector. The state’s financial watchdog has announced that these lenders are being investigated in connection with securities law violations, singling out BlockFi and Voyager Digital as two companies it has already established that have offered unregistered securities in the state.

In a consumer alert this week, the California Department of Financial Protection and Innovation (DFPI) announced that it’s investigating multiple companies nationwide that offer their users interest-bearing accounts.

The regulator said it has become concerned in recent weeks as some of these companies have been preventing their users from withdrawing their assets amid a drastic dip in digital asset prices. Celsius Network was among the first to halt withdrawals, an event that seemed to have a butterfly effect on the rest of the industry. Voyager Digital also halted withdrawals and then, a few days later, filed for Chapter 11 bankruptcy. In an industry where almost every other company seems interconnected, the effects have been far-reaching, with some like Three Arrows Capital collapsing.

The DFPI warned Californian investors that most digital asset lenders may not have adequately disclosed the risk that their customers face when they deposit their assets with them.

“Crypto-interest account providers are not governed by the same rules and protections as banks and credit unions, which are required to have deposit insurance,” the watchdog reminded investors.

DFPI’s investigations have already found that certain interest-bearing accounts are unregistered securities, it revealed, citing BlockFi and Voyager Digital as some of the offenders.

“The purpose of securities registration, in part, is to ensure that investors receive all material information needed to evaluate whether to enter into these crypto-interest account arrangements, such as risks being taken with deposited funds,” it said.

DFPI urged investors to exercise extreme caution before investing with any digital asset lender. For those whose lenders have halted withdrawals, the department called on them to contact it with their questions and file formal complaints.

The digital asset lending sector has felt this year’s bear market the most. These lenders have been offering very high returns to investors, attracting tens of billions from investors. However, with prices collapsing in April, a bank run ensued, and most of them couldn’t keep up. For others, their intricate entanglement with other failing ventures (such as Voyager Digital to 3AC) proved to be their downfall.

And while Sam Bankman-Fried has come to the rescue of some like BlockFi, to which he lent $400 million through FTX, even he might not be rich enough to save the sinking ship.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.