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Celsius’ move to freeze crypto withdrawals could result in tighter regulations, executives say

Liquidity issues at crypto lending platform Celsius Network, which has left its 1.7 million customers unable to repay their assets, will increase US regulatory pressure on the sector, already on the defensive in other crises this year found.

The industry has struggled to scrutinize concerns that digital assets are being used to circumvent sanctions against Russia and the collapse of cryptocurrency TerraUSD in May, sending the market tumbling and raising concerns about systemic risk.

How the Crypto Crash Exposed the Lies of the Industry — and Failed Retail Investors

New Jersey-based Celsius’s move this week to freeze payouts, citing “extreme” market conditions, has brought to light another problem with the crypto sector: weak investor protections.

Crypto executives say recent troubles show US regulators have been too slow to provide the clarity needed to protect Americans on a daily basis, but they expect that to change quickly.

“We are now seeing the consequences if regulators don’t provide clarity,” said Perianne Boring, founder and CEO of the Chamber of Digital Commerce. “I’m confident that recent events will accelerate efforts to provide clearer guidance to the industry and reassurance to those investing in digital assets.”

The recent turmoil in the cryptocurrency market underscores the “urgent need” for regulatory frameworks that reduce the risks of digital assets, a U.S. Treasury Department official said Thursday.

Crypto lenders collect and reinvest crypto deposits from retail customers. Such products, which sometimes herald double-digit returns, have attracted tens of billions of dollars in assets. However, when its investments turned sour amid the crypto market crash, Celsius failed to make repayments.

Unlike traditional financial firms, crypto lenders operate in a regulatory gray area, meaning their deposits are not government-insured, a risk Celsius discloses on its website. Like many of its competitors, Celsius hasn’t filed with the Securities and Exchange Commission (SEC), which means it’s subject to few risk management, capital, and disclosure regulations.

As a result, customers have had little insight into how they invested their assets and it is unclear if they will get them back.

“Depositors/investors need to at least understand the risks they’re taking,” said Todd Phillips, director of financial regulation at the Center for American Progress, a Washington think tank.

Celsius CEO Alex Mashinsky tweeted Wednesday that the company is focused on customer concerns.

While banking regulators believe they need Congress to give them oversight over crypto companies, securities regulators had begun cracking down on lending products over the past year.

Of course, Celsius was on their radar. In September, regulators in Kentucky, New Jersey and Texas issued a cease-and-desist order to Celsius, arguing that its interest-bearing products should be registered as securities.

The SEC blocked Coinbase Global Inc’s plan to launch a lending product last year and sued lending platform BitConnect for fraud.

In February, the SEC and state regulators fined BlockFi $100 million for failing to register its crypto lending product. The SEC said the deal should provide a roadmap for other crypto lenders to register their products, though it’s unclear how many companies will follow.

The SEC and regulators in Kentucky, New Jersey and Texas did not immediately respond to requests for comment Thursday. On Tuesday, SEC Chairman Gary Gensler warned that some crypto products are “too good to be true.”

Registering crypto lending products would not eliminate all risks for investors, but would increase transparency regarding such products and ensure some risk management controls, experts said.

However, many companies want to avoid this burden by making regulators responsible for instituting enforcement actions that take years to build. Still, attorneys said the SEC would likely step up such efforts.

“Given the general aggression of the SEC under Gensler…the agency is likely combing through the statutes to find claims that can be made regarding crypto lending,” said Howard Fischer, partner at law firm Moses & Singer.

Some industry executives welcome more regulation, which would put the best companies on top. In February, rating agency Fitch said increased disclosures and requirements were “credit positive” for the credit sector.

“Investors want to know that their assets are safe,” said Mike Belshe, CEO of BitGo, a digital asset trust company. “We will see a shakeout of healthy companies that manage risk well.”

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