nkingP2P Crypto Lending Update

Despite the collapse of popular crypto lending platforms such as Celsius and BlockFi, platforms such as Aave and Nexo remain. But what is the regulatory landscape that they now face and what can early stage lending platforms expect?

P2P Crypto Lending

Peer-to-peer (P2P) crypto lending platforms have emerged as a popular alternative to traditional financial intermediaries, offering individuals and businesses the opportunity to borrow and lend money directly to one another using cryptocurrency as collateral for the loan. While P2P lending has provided increased access to credit and investment opportunities, it also raises important regulatory considerations. Regulators around the world are faced with the challenge of striking a balance between protecting investors and borrowers while fostering innovation and financial inclusion.

Lending License Requirement

The primary regulatory considerations for P2P crypto lending platforms is licensing and registration. Overwhelmingly, states have required lending platforms to obtain lending licenses. Lending license statutes across the United States require platforms to adhere to specific capital requirements, liquidity standards, disclosure requirements and operational guidelines to safeguard the interests of borrowers and lenders. This includes setting limits on the maximum loan amount, caps on interest rates, and restrictions on the types of loans that can be offered. Such measures aim to prevent predatory lending practices and excessive borrower indebtedness.

Moreover, licensed lenders must employ robust risk management and due diligence practices. Platforms are expected to assess the creditworthiness of borrowers, conduct thorough background checks, and employ appropriate risk assessment models. The quality of loan origination and underwriting processes significantly impacts the overall stability and credibility of the P2P lending sector. As we saw with the collapse of Celsius and BlockFi, the failure by both to properly assess the creditworthiness of borrowers was a major impetus for their decline.

The U.S. federal government together with each state regulate P2P crypto lending platforms in some manner. However, the requirements and applicability of each state lending law will vary based on such factors as the size and nature (commercial v. consumer) of the loan. A brief overview of each state’s lending laws follows:

Laws of the United States

The United States’ Truth in Lending Act, and the implementing Regulation Z thereunder, defines a “consumer” as a “natural person to whom consumer credit if offered or extended.” 12 CFR §226.2(11). Whereas, the Act defines “consumer credit” as “credit offered or extended to a consumer primarily for personal, family or household purposes.” 12 CFR §226.2(12). Conversely, Regulation Z defines a business or commercial loan as either an “extension of credit primarily for a business, commercial or agricultural purpose,” or “extension of creditor to other than a natural person …” 12 CFR §226.3(a)(1) & (2). The United States does not have a commercial lending license requirement.

The State of Alabama Small Loan Act requires a license to extend a loan “in amounts less than one thousand five hundred dollars ($1,500) . . .” A.S. 5–18–4(a). The State does not have a commercial lending license requirement.

The State of Arkansas prohibits consumer installment loans. The State does not have a commercial lending license requirement.

The State of Alaska Small Loan Act requires a license to extend a loan “in the amount or of the value of $25,000 or less …” A.S. 06.20.010(a). The State does not have an additional commercial lending license requirement.

The State of Arizona does not require a license to extend a loan to “a person who is not regularly engaged in the business of making consumer lender loans . . .” A.R.S. 6–602(A)(3). The State does not have a commercial lending license requirement.

The State of California Financing Law defines a “finance lender” as “any person who is engaged in the business of making consumer loans or making commercial loans.” Cal Civ. Code § 22009. A “commercial loan” is further defined as “a loan of a principal amount of five thousand dollars ($5,000) or more … the proceeds of which are intended by the borrower for use primarily for other than personal, family or household purposes.”

The State of Colorado exempts loans made to a “person other than an organization” from the requirement to obtain a license. C.R.S. 5–1–301. The State does not have a commercial lending license requirement.

The State of Connecticut Banking Law requires a license for the extension of a loan where the “amount of value is fifteen thousand dollars or less.” Conn Gen Stat §36a-555. The State does not have an additional commercial lending license requirement.

The State of Delaware requires a license where a party “transact[s] the business of lending money in this State” Del Law §2202.

The State of Florida Consumer Finance Act prohibits “consumer finance loans” in an amount less than $25,000 without a license. F.R.S. 516.02(1). The State does not have a commercial lending license requirement.

The State of Georgia Industrial Loan Acts prohibits loans in an amount less than $3,000 without a license. Ga. Code § 7–3–8. The State does not a commercial lending license requirement.

The State of Hawaii prohibits consumer installment loans. The State does not have a commercial lending license requirement.

The State of Illinois Consumer Installment Loan Act requires a license for “making loans in a principal amount not exceeding $40,000” Ill Rev. Stat. 205 ILCS 670/1. The State does not have an additional commercial lending license requirement.

The State of Indiana Uniform Consumer Credit Code requires a license for loans in an amount “not more than five hundred fifty dollars …” IC 24–4.5–7–104. The State does not have a commercial lending license requirement.

The State of Idaho prohibits consumer installment loans. The State does not have a commercial lending license requirement.

The State of Iowa Regulated Loan Act requires a license for loans “in the amount or of the value of twenty-five thousand dollars…” ICA 536.1. The State does not have an additional commercial lending license requirement.

The State of Kentucky Financial Services Code requires a license for loans “in the amount or of the value of fifteen thousand dollars ($15,000) or less…” KRS 286.4–420. The State does not have an additional commercial lending license requirement.

The State of Kansas Uniform Consumer Credit Code requires a license for making a “consumer loan” which is defined as “the debt is incurred primarily for a personal, family or household purpose” K.S.A. 16a-1–301. The State does not have an additional commercial lending license requirement.

The State of Louisiana Consumer Credit Law specifically exempts from a license requirement any “credit transactions involving extensions of credit for business, commercial, or agricultural purposes. . .” La R.S. §§ 9:3510. The State does not have an additional commercial lending license requirement.

The State of Maine Consumer Credit Code specifically exempts from a license requirement any extensions of credit “primarily business, commercial or agricultural purposes . . .” 9 M.R.S. 1–101. The State does not have an additional commercial lending license requirement.

The State of Maryland Consumer Loan Law specifically exempts from a license requirement any extension of credit “which does not exceed $6,000 . . .” Md. Code. Ann. 12–302. The State does not have an additional commercial lending license requirement.

The State of Massachusetts Small Loan Action exempts from a license requirement any extension of credit “which does not exceed $6,000 . . .” Mass. Gen. Laws Ann ch. 140 96. The State does not have an additional commercial lending license requirement.

The State of Michigan Regulatory Loan Act requires a license only for loans “made by a licensee to an individual for personal, family, or household use . . .” MCL 493.1. The State does not have an additional commercial lending license requirement.

The State of Minnesota Regulated Loan Act requires a license to “engage in the business of making loans of money, credit, goods or things in action, in an amount or of a value not exceeding [$100,000] . . .” Minn. Stat. 56.01. The State does not have an additional commercial lending license requirement.

The State of Mississippi “Small Loan Regulatory Law and Small Loan Privilege Tax Law does not apply to persons engaged in the business of extending credit to borrowers primarily for business or commercial purposes . ..” Miss. Code Ann. § 75–67–129. The State does not have an additional commercial lending license requirement.

The State of Missouri Consumer Loan Act specifically exempts from a license “loans to corporations . . .” Mo. Rev. Stat 408.100. The State does not have an additional commercial lending license requirement.

The State of Montana Consumer Loan Act prohibits extending “consumer loans” without a license where a “consumer loan” is defined as “credit offered or extended to an individual primarily for personal, family or household purposes …” §32–5–103 MCA. The State does not have an additional commercial lending license requirement.

The State of Nebraska does not have a commercial lending license requirement.

The State of Nevada Installment Loan and Finance Act requires a license for the extension of an “installment loan.” N.R.S. 675.035

The State of New Jersey does not have a commercial lending license requirement.

The State of New Hampshire Installment Loan Act requires a license for the making of loans “in the amount of $10,000 or less . . .” NH Rev Stat 399:A-1. The State does not have an additional commercial lending license requirement.

The State of New Mexico Small Loan Act requires a license for the making of loan in the amount of “five thousand dollars ($5,000) or less . . .” NMSA 58–15–3. The State does not have an additional commercial lending license requirement.

The New York Banking Law requires a license for the making of a loan in the amount of “less than $50,000 if for commercial use . . .” N.Y. Banking Law § 340–342. The State does not have an additional commercial lending license requirement.

The State of North Carolina Consumer Finance Act requires a license for the making of a loan in the amount of “fifteen thousand dollars ($15,000) or less . . .” G.S. §53–166. The State does not have an additional commercial lending license requirement.

The State of North Dakota prohibits consumer installment loans. The State does not have a commercial lending license requirement.

The State of Ohio Short Term Loan Act does not impose a license requirement for the making of a loan in the amount of of “five thousand dollars or less . . .” Ohio Rev. Code §1321.02. The State does not have an additional commercial lending license requirement.

The State of Oklahoma Uniform Consumer Credit Code does not require a license for making loans “incurred primarily for a personal, family or household purpose . . .” Ok. Stat. Ann. §14A-3–104. The State does not have an additional commercial lending license requirement.

The State of Oregon Consumer Finance Act does not require a license to extend a “consumer finance loan” which is defined as a “loan or line of credit that is unsecured or secured by personal or real property…” 54 Or. Rev. Stat. §725.010. The State does not have an additional commercial lending license requirement

The State of Pennsylvania does not have a commercial lending license requirement.

The State of Rhode Island does not have a commercial lending license requirement.

The State of South Carolina Consumer Protection Code does not require a license to extend a “consumer loan” which is defined as a “debt incurred primarily for a personal, family or household purpose.” S.C. Code Ann. 37–3–104. The State does not have a commercial lending license requirement.

The State of South Dakota requires a license to engage in the “business of lending money,” which includes the “originating, selling, servicing, acquiring or purchasing of a loan involving a borrower who is a person …” SDCL 54–4–36. The definition, however, does not include the “sale of assets to a purchaser . . .” Id. The State does not have a commercial lending license requirement.

The State of Tennessee does not have a commercial lending license requirement.

The Texas Finance Code requires a license only where the loan is made for “primarily for personal, family, or household use . . .” Tex. Bus & Com Code 342.005. The State does not have an additional commercial lending license requirement.

The Utah Consumer Credit Code specifically exempts loans made “primarily for business, commercial, or agricultural purposes. . .” Utah Code Ann. §70C-1–202. The State does not have an additional commercial lending license requirement.

The State of Vermont Licensed Lender Law requires a license to “ engage in the business of making loans of money, credit, goods, or things in action and charge, contract for, or receive on any such loan interest, a finance charge, discount, or consideration therefor . .” Vt. Stat. Ann. 2200

The State of Virginia Consumer Finance Act prohibits making loans to “individuals for personal, family, household or other nonbusiness purposes . . .” without a license. Va. Code Ann 6.2–1501. The State does not have a commercial lending license requirement.

The State of Washington Consumer Loan Act specifically exempts “any person making a loan primarily for business, commercial, or agricultural purposes . . .” R.C.W. 31.04.025. The State does not have a commercial lending license requirement.

The State of West Virginia Consumer Credit and Protection Act prohibits making loans to a “consumer” without a license. WV Code §46A-4–102. The State does not have a commercial lending license requirement.

The State of Wisconsin Consumer Act specifically exempts making loans for “personal, family or household purposes . . .” from a license requirement. Wis. Stat. 421.301. The State does not have an additional commercial lending license requirement.

The State of Wyoming Consumer Credit Code specifically exempts specifically exempts from a license requirements loans not made “primarily for a personal, family or household purpose . . .” Wyo. Stat Ann. 40–14–204. The State does not have an additional commercial lending license requirement.

Money Service Business Registration

Whether a P2P crypto lending platform is required to register as an MSB depends on the specific services it provides. If the platform facilitates the transmission of funds between borrowers and lenders or engages in other money transfer activities, it may fall under the purview of MSB regulations. However, platforms that solely match borrowers and lenders without directly handling crypto will likely not have the obligation to register. However, where the lending platform provides custody of crypto collateral, MSB registration is likely advisable as it mirrors wallet hosting.

AML & KYC

P2P lending platforms, regardless of MSB registration requirements, often need to comply with anti-money laundering (AML) and know-your-customer (KYC) regulations based upon existing state lending regulations as well as certain federal consumer protection statutes such as the Truth in Lending Act. These regulations aim to prevent money laundering, terrorist financing, and other illicit activities. Compliance may include implementing robust identity verification processes, reporting suspicious transactions, and maintaining proper record-keeping.

Conclusion

Following the collapse of Celsius and BlockFI, the P2P crypto lending vertical has come under heavy regulatory scrutiny. As such, lending platforms must seek to follow what in many respects seems like a broken regulatory framework until clear guidance is offered by legislators at both the state and federal level.

About Adam Tracy

Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.

Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor — both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.

In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.

Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, Hollywood Reporters, CNBC, Reuters, CoinDesk, and Bitcoin.com.

Find Adam: https://linktr.ee/adamtracy

Blockrunner, LLC., is a financial services match-making marketplace and consulting company. We are not a bank, FI/NBFI, Payment Service Provider, deposit taking institution, trust, or money services business of any kind. We are not regulated by any financial regulator. Banking, Payment, Processing, and Licensing services are provided by our participating members. This website is for informational purposes only and does not constitute legal advice. If you need legal advice, please consult a licensed attorney in your jurisdiction.

Originally published at http://adamtracy.io on May 31, 2023.