Cryptocurrency start-ups dangle high yields to tap digital token holders’ idle assets

·4-min read

An increasing number of start-ups in Hong Kong are offering cryptocurrency-lending services, claiming to provide high returns. However, as regulations on such blockchain-based decentralised finance (DeFi) are unclear, industry observers are urging clarity to protect investors.

Cryptocurrency exchange Gemini last week rolled out an interest-earning programme, Gemini Earn, which enables its customers to receive an annualised yield of up to 8.05 per cent by lending out their digital tokens to third parties by parking these assets on the platform. A one-month US dollar deposit at a Hong Kong bank, on the other hand, yields 0.01 per cent.

First launched in the US by the New York-headquartered exchange in February, the service has thus far originated over US$4 billion in cryptocurrency loans, according to Jeremy Ng, Gemini’s Asia-Pacific managing director. The service supports deposits of more than 40 cryptocurrencies, including stable coins, or digital tokens, that are backed typically by the US dollar.

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“Hong Kong is an important market for crypto, and ‘Earn’ solidifies our intent to service the growing crypto market here,” said Ng.

Another start-up, CoinUnited, also offers a lending service whose annualised interest rates can be as high as 13 per cent. The over-the-counter cryptocurrency exchange operator offers the deposit and lending service through its crypto-wallet app.

DeFi makes it possible for users to borrow and lend funds to each other without the need for traditional players such as banks or brokers, thanks to the blockchain’s smart contract. Digital tokens are pooled together by cryptocurrency platforms such as Gemini and CoinUnited which then lend them to borrowers – third-party DeFi blockchain application platforms – who post collateral to back up the loan and pay the individual depositors interest. These platforms essentially serve as a bridge linking depositors with borrowers.

But DeFi also highlights the regulatory challenges to protect investors. Some Industry observers want to know what safeguards would apply to investors in the event of a player going bust, or if there is a crisis of confidence affecting the US$2 trillion global cryptocurrency market.

If the collateral pledged against a DeFi transaction suddenly experiences a high level of volatility and loses much of its value, that could lead to a downward spiral if investors start panicking and pull out of such products, according to Benjamin Quinlan, chief executive of consultant Quinlan & Associates, a consultancy specialising in the financial services industry.

“When there are multiple platforms facing long lines of customers eager to withdraw their hard-earned deposits, we may end up in a similar situation to the bank runs we have seen during the Great Depression,” said Quinlan. “Except this time people will be lining up at internet gateways as there is no deposit insurance maintained by a central bank in the DeFi world.”

The expansion of such services to Hong Kong comes amid controversy surrounding its development in the US.

Last month, the Securities and Exchange Commission threatened to sue US cryptocurrency exchange Coinbase if it were to press on with the launch of its “Lend” product, which allows users on its platform to earn a yield on their digital assets.

The US regulator told Coinbase that it considered the product a “security”, and therefore a launch would trigger enforcement action, causing it to subsequently drop its plans, according to media reports.

The Securities and Futures Commission in Hong Kong declined to comment on queries whether such a product constitutes a “security” under the city’s securities rules.

Gemini’s Ng said the start-up will only offer products in jurisdictions where it is “legally permissible to do so”.

“We have diligently assessed its features in light of the laws and regulations of Hong Kong, and are comfortable that it does not exhibit characteristics that would cause it to be classified as a ‘security’,” said Ng.

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