SEC Settles Charges Against Linus Financial Over Unregistered Retail Crypto Lending Product

The US Securities and Exchange Commission (SEC) announced Thursday that it will settle charges against Tennessee-based fintech firm Linus Financial over sales of an unregistered cryptocurrency lending product.

The regulator declared that it will abstain from imposing civil penalties against Linus Financial due to the firm’s immediate cooperation and prompt remedial actions.

Linus Financial began to offer and sell its crypto lending product – Linus Interest Accounts – in the United States around March 2020. The product allegedly allowed investors in the US to bid US dollars in exchange for Linus’ promise to pay interest, the regulator wrote.

“Linus Financial converted investors’ cash into crypto assets, pooled the crypto assets, and controlled how the pooled assets were used to generate income for Linus Financial itself and for investors’ interest payments,” per SEC’s order.

The crypto lending product was sold as securities, which did not qualify for an exemption from SEC registration, it further noted.

However, shortly after the regulator announced charges against a similar crypto product last year, Linus Financial stopped offering its retail crypto lending product and asked investors to withdraw their funds, latest by April 2022.

According to the settlement agreement, Linus Financial agreed to a cease-and-desist order “without admitting or denying the SEC’s findings.”

Stacy Bogert, Associate Director of the SEC’s Division of Enforcement said that the regulator has been stringent in holding companies accountable for securities laws violations.

“But we also want to encourage companies to cooperate and take prompt corrective action when problems arise. Today’s settlement provides a valuable message to other market participants about the importance of cooperation and remediation.”

SEC’s Classification of Cryptos as Securities

The SEC sued two of the world’s largest exchanges – Binance and Coinbase – in June, alleging that they were operating as unregistered securities exchanges and offered trading in cryptocurrencies that should have been registered as securities.

The agency has been firm in its contention that most digital assets, except for Bitcoin (BTC) and Ether (ETH), are securities and subject to oversight. The SEC uses the “Howey Test” to determine if a digital asset is a security.

The SEC claims have brought significant uncertainty to the crypto industry, leading to delistings, decline in prices and pivoting business models.

However, the recent victory of Ripple against the SEC would possibly galvanize crypto exchanges and firms to resist the agency’s attempt to assert its authority over the industry.