California’s DFPI Investigating Multiple Crypto Lending Companies

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Updated: Jul 13, 2022, 10:38 UTC

California's consumer financial regulator is investigating multiple crypto-interest account providers

Key Insights:

DFPI is assessing whether firms that suspended customer withdrawals and transfers have violated its laws.
The regulator is particularly focused on companies that offer crypto-interest accounts.
This comes as customer funds on many platforms have been locked up for several weeks.

The California Department of Financial Protection and Innovation (DFPI), which oversees the operations of state-licensed financial institutions including banks and premium finance companies, has announced that it is looking into whether firms that suspended customer withdrawals and transfers have violated its laws.

More specifically, the regulator is investigating several U.S-based crypto companies after a series of well-known lenders indefinitely halted withdrawals and transfers between user accounts.

Interest-bearing Crypto Asset Accounts

The Department of Financial Protection and Innovation is particularly focused on “multiple companies” that offer customers interest-bearing crypto asset accounts, or crypto-interest accounts, as well as service providers that “may not have adequately disclosed risks customers face when they deposit crypto-assets onto [lenders’] platforms”.

The overarching purpose of the investigation is to determine whether they are violating laws under the Department’s jurisdiction.

The DFPI previously emphasised that crypto-interest account providers are not governed by the same rules and protections as banks and credit unions, which is especially concerning as some platforms are preventing customers from withdrawing and transferring between their accounts.

As such, the regulator has encouraged consumers to exercise “extreme caution” before responding to any solicitation offering investment or financial services.

In addition, DFPI has expressed how certain crypto-interest account providers have been providing unregistered securities and pointed to two cease and desist orders it recently issued to BlockFi and Voyager Digital to stop their offerings in California.

Locking up Customer Assets

DFPI’s announcement comes after crypto lender Voyager Digital filed for Chapter 11 bankruptcy, becoming the second high-profile crypto company to do so in recent weeks. The Toronto-based firm estimates that it has more than 100,000 creditors and somewhere between $1 and $10 billion in assets, and liabilities worth the same value.

Voyager Digital explained that the move is part of a ‘Plan of Reorganization’ that aims to enable clients to regain access to their accounts. Customers will be able to receive a combination of crypto, proceeds from the Three Arrows Capital recovery, common shares in the newly reorganised company, and Voyager tokens.

Celsius (CEL) has kept withdrawals and transfers frozen since June 12 due to liquidity concerns, with rumours circulating that the company’s management has been debating with lawyers over whether the business should file for Chapter 11 bankruptcy.

The company is currently is seeking restructuring advice from the advisory firm Alvarez & Marsal as it deals with the possibility of insolvency.

The Singapore-based crypto platform Vauld also halted operations last week citing financial difficulties amid volatile market conditions. The company immediately suspended all deposits, withdrawals and trading, and announced that it would only process customer deposits related to its collateralised loans product until further notice.

As it stands, customer funds on many platforms have been locked up for several weeks, with the fate of their depositors’ holdings still uncertain.

About the Author

Mohadesa Najumiauthor

Mohadesa Najumi is a British writer who has worked within crypto, forex, financial technology, and the stock market industry. Mohadesa received her MSc in Political Science and International Relations at the University of Amsterdam.