Faculty of law blogs / UNIVERSITY OF OXFORD

How Should Crypto Lending be Regulated Under EU Law?


Emilios Avgouleas
Chair of International Banking Law and Finance, University of Edinburgh
Alexandros Seretakis
Assistant Professor of Law in Capital Markets/Financial Services, Trinity College Dublin


Time to read

3 Minutes

The last few years have seen the exponential growth of crypto lending, with lenders such as Celsius and BlockFi, and DeFi protocols such as MakerDAO and Compound dominating the space. Nonetheless, the failure of Celsius Network and Voyager has alarmed policymakers to the importance of crypto lenders for crypto markets and the fragility of their business model. Moreover, the spectacular collapse of FTX created contagion across the industry and had a spillover effect on crypto lenders with major firms such as Genesis and BlockFi suspending withdrawals of customer funds and filing for bankruptcy.

Crypto lenders, such as Celsius and Voyager, sought to provide a solution to two distinct problems facing crypto holders: lack of liquidity and market purchasing power. Crypto holders face a liquidity problem since crypto currencies are not widely accepted as a medium of exchange. Thus, holders of crypto who want to monetize their holdings can convert them into fiat currency. Essentially crypto lenders offered to crypto holders the opportunity to earn handsome returns on their crypto holdings, through staking, which is only available to holders of big portfolios. In essence, crypto lenders engage in secured lending, which allows holders to deposit their assets and borrow fiat currency or other digital assets using their crypto holdings as collateral. Furthermore, users can also earn rewards on these assets at rates that are more favourable than those offered by traditional intermediaries or other crypto platforms. Crypto lenders are performing credit intermediation outside the regular banking system. As a result, they should be understood as a form of shadow banking.

In our article, How Should Crypto Lending Be Regulated under EU Law?, we argue that the key financial stability threat of crypto lending comes from the excessive volatility of crypto-currency markets and the fact that lots of crypto assets, such as non-fungible tokens (NFTs) are very complex and very hard to value, making it very difficult to obtain adequate collateral to secure the loan. User leverage within the system remains very high. This practice exposes crypto lenders to suspicions and rumors about their financial health, thus causing market panic, manifested as depositor runs, which expose the well-concealed liquidity imbalances within crypto lenders, leading crypto lenders and crypto-exchange platforms to face the risk of illiquidity. Even though the links of interconnectedness between crypto lenders and mainstream financial institutions are limited, market panic, including a flight to safe assets, is a behavioral phenomenon and is very hard to contain ex ante. A valid concern here is whether investor runs from the crypto markets can evolve into a generalized confidence crisis, despite the fact that the links between crypto lenders and regulated financial institutions appear to be limited.

What is more, widespread incidents of fraud have been observed in the crypto lending markets. The opaque and complex nature of crypto lending provides fertile ground for fraudsters. For example, in July 2022, the Securities and Exchange Commission (SEC) issued a cease-and-desist order against US crypto lender Voyager for falsely presenting itself as being covered by the US Federal Deposit Insurance Corporation (hereinafter ‘FDIC’), misleading users into believing that their deposits were insured by the FDIC and the FDIC would insure them against the failure of Voyager. Finally, concerns have been raised regarding the potential use of crypto lending as a vehicle for money laundering, tax evasion and terrorist financing.

We argue that the activities of crypto lenders, which involve the taking of deposits in crypto assets and the granting of crypto-secured loans in fiat, resemble the activities of credit institutions. The lack of crypto lending regulation creates a competitive advantage for crypto lenders vis-a-vis licensed banks. Unregulated crypto lenders are able to produce returns by taking on excessive risk. Our article argues that crypto lenders fall within the definition of credit institutions under EU law. As a result, they should be subject to the stringent licensing and prudential requirements provided by the Capital Requirements Directive and Regulation. Prudential regulation can deal with any systemic risk issues with which investor protection regulation cannot deal. However, in order to avoid both moral hazard and giving investors the false impression that crypto lenders are safe/too-big-to-fail institutions, we suggest that crypto lenders should not enjoy the full protection of prudential regulations. In particular, they should not be offered lender of last resort support and they should not be allowed to subscribe into a deposit insurance scheme.

Emilios Avgouleas is Chair in International Banking Law and Finance at the School of Law, University of Edinburgh.

Alexandros Seretakis is an Assistant Professor (Capital Markets/Financial Services) and Fellow of Trinity College, Dublin.

The authors are grateful to professor Rosa Maria Lastra, Sir John Lubbock, Chair in Banking Law, Commercial Law Centre, Queen Mary, University of London, for very constructive comments and feedback.


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