California Crypto Crackdown: DFPI Orders MyConstant to Cease Crypto Lending Services

Are you keeping a close eye on your crypto investments? Recent news from California might grab your attention, especially if you’re involved in crypto lending platforms. The California Department of Financial Protection and Innovation (DFPI) has just dropped the hammer on MyConstant, a crypto lending platform, ordering them to stop offering several of their crypto products. What’s behind this regulatory action, and what does it mean for crypto users in California and beyond? Let’s dive into the details.

Why is California’s DFPI Cracking Down on MyConstant?

In a nutshell, the DFPI alleges that MyConstant has been violating California securities laws and consumer financial protection laws. The official order, issued on December 21st, demands MyConstant to “desist and refrain” from offering:

• Peer-to-peer Loan Brokering Service: The DFPI claims this service violates state financial codes.
• Interest-Bearing Crypto Asset Accounts: Regulators are concerned about these accounts under California Securities Law and the California Consumer Financial Protection Law.

Let’s break down these concerns further.

Unlicensed Loan Brokering: A Red Flag?

The DFPI is accusing MyConstant of acting as an “unlicensed loan broker.” Essentially, they believe MyConstant was connecting lenders and borrowers without possessing the necessary licenses to operate legally in California. This is a significant issue as licensing ensures a level of oversight and consumer protection within the financial industry.

The Problem with Crypto Interest Accounts

MyConstant’s fixed interest crypto asset products are also under scrutiny. These products work by having customers deposit cryptocurrencies (like stablecoins) or even traditional fiat currency, with the promise of a fixed annual percentage interest return. Sounds appealing, right? However, the DFPI sees a problem. They argue that in offering these products, MyConstant was essentially selling “unqualified, non-exempt securities.”

But what does that actually mean?

Securities laws are designed to protect investors. When a company offers securities, they generally need to register them with regulatory bodies, providing transparency and ensuring certain investor protections are in place. The DFPI is suggesting that MyConstant’s crypto interest accounts fall under the definition of securities but were being offered without proper registration or exemptions.

A Warning Sign from July: The Writing on the Wall?

This action by the DFPI isn’t entirely out of the blue. Back in July, the regulator announced they were investigating several crypto interest account providers. They explicitly stated they were looking into potential violations of laws under their jurisdiction. This July warning was a clear signal that California was taking a closer look at the crypto lending space.

MyConstant’s Troubles: A Timeline

The DFPI’s investigation into MyConstant was publicly announced on December 5th, stating the platform was “not licensed” to operate in California. However, MyConstant’s challenges appear to have started even earlier.

• November 17th: Market Turmoil and Withdrawal Halts: MyConstant announced that “rapidly deteriorating market conditions” led to significant withdrawals, making it impossible to continue normal operations. They limited business activities and halted withdrawals.
• December 5th: DFPI Public Investigation Announcement: The DFPI officially announced its investigation, highlighting MyConstant’s lack of license.
• December 15th: Updated Plan for Users: MyConstant provided users with an updated plan via their website, including financial overviews, liquidation schedules, and recovery estimates.
• December 21st: Cease and Desist Order: The DFPI issued the formal order for MyConstant to stop offering specific services due to securities law violations.

What’s Next for MyConstant and its Users?

MyConstant has been communicating updates to its users through its website. As of December 15th, they stated they would continue to manage existing crypto-backed loans. This includes:

• Ensuring borrower compliance
• Processing loan repayments
• Returning collateral upon loan completion
• Liquidating collateral in case of default

However, the future of MyConstant’s broader operations in California and the availability of their crypto interest products remains uncertain given the DFPI’s strong stance.

Key Takeaways for Crypto Users and Platforms

This situation with MyConstant and the California DFPI highlights several crucial points for both crypto users and platforms:

• Regulatory Scrutiny is Increasing: Government bodies are paying close attention to the crypto industry, particularly crypto lending and interest-bearing accounts. Expect more regulatory actions as authorities seek to apply existing laws to the crypto space.
• Compliance is Key: Crypto platforms must prioritize regulatory compliance. Operating without proper licenses or offering unregistered securities can lead to severe consequences.
• User Due Diligence is Essential: As a crypto user, it’s crucial to understand the platforms you use. Are they licensed and regulated? What are the risks involved in their products? Don’t just chase high interest rates without considering the regulatory landscape and potential risks.
• Clarity Needed in Crypto Regulations: The evolving nature of crypto assets and services requires clear and updated regulations. This case underscores the ongoing debate and interpretation of how securities laws apply to crypto products.

In Conclusion: Navigating the Evolving Crypto Regulatory Landscape

The California DFPI’s action against MyConstant is a significant development in the crypto regulatory landscape. It serves as a stark reminder that regulatory bodies are actively monitoring and enforcing existing financial laws within the crypto industry. For crypto platforms, compliance is no longer optional but a necessity for sustainable operation. For users, understanding the regulatory environment and choosing platforms that prioritize compliance and transparency is paramount to protecting their investments in this dynamic and evolving financial frontier.