Money Stuff: Lending Bitcoins Is Tricky

Oh, sure, yes, absolutely. The rule in the U.S. is that an “investment contract,” meaning “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,” is a security, and generally can’t be sold to the public without registering it with the Securities and Exchange Commission, delivering a prospectus with audited financial statements, etc. A Bitcoin lending program — in which (1) a bunch of people pool their Bitcoins, (2) some manager or smart contract lends those Bitcoins to borrowers who pay interest, and (3) some or all of the interest is paid back to the people in the pool — is pretty straightforwardly an investment contract and thus a security.

I have been saying this for months, though that’s only because the SEC has also been saying it for months. But I admit that the SEC hasn’t been saying it in a particularly clear way. There’s not an SEC press release saying “FYI crypto lending programs are obviously securities.” And I gather that there are about a lot of crypto lending programs — they’re a staple feature of decentralized finance platforms — and roughly none of them are registered with the SEC. The SEC and state regulators have brought enforcement actions against a few of them — we’ve talked about BitConnect and BlockFi and Blockchain Credit Partners — but I suppose each of those is distinctive in its own way, and there are about a zillion others that haven’t been sued by the SEC.[1] So you could reasonably look around and be like “oh sure we can pool people’s Bitcoins and lend them and pass along the interest, that's not a security that should involve the SEC.” You’d be wrong, but I get where you’re coming from.