PERG 18.9 Activity: cryptoasset lending and borrowing

Question 9.1: What is cryptoasset lending and borrowing and what regulated activities might be involved?

Qualifying cryptoasset lending or borrowing are not distinct regulated activities but examples of transactions in qualifying cryptoassets that are likely captured by other regulated cryptoasset activities.

Qualifying cryptoasset lending describes the disposal of a qualifying cryptoasset from a person (A) to or via another person (B), subject to an obligation or right to reacquire the same or equivalent qualifying cryptoasset from B, typically with compensation paid to A in the form of yield.

Qualifying cryptoasset borrowing is similar but operates with qualifying cryptoassets moving in the opposite direction. It describes the disposal of a qualifying cryptoasset from or via person B to person A, subject to an obligation or right to reacquire the same or equivalent qualifying cryptoasset from A, which may include the provision of collateral and/or payment of interest from A.

Viewed holistically, these transactions may resemble ‘loans’, but the legal implications of the precise arrangements matter more than the terminology used. In most instances, the various transactions that constitute qualifying cryptoasset lending or borrowing will amount to deals, not loans. This is because the disposal of a qualifying cryptoasset from person A to person B and/or the disposal of a qualifying cryptoasset from person B to person A would constitute a deal on the basis that ‘dealing’ includes buying, selling, subscribing for or underwriting a qualifying cryptoasset, and ‘buying’/‘selling’ are defined in article 3 of the Regulated Activities Order as including acquisition/disposal for valuable consideration. The reacquisition of the same or equivalent qualifying cryptoasset would also constitute a deal. Further, where yield is provided to person A and that yield is in qualifying cryptoassets, or where A provides qualifying cryptoassets as interest payments, this would also constitute dealing.

Whether person A and/or person B require permission in order to carry on these activities will depend on the role they play in these arrangements. It will also depend on whether they are engaging in these deals themselves as principal or agent, or whether they are arranging these deals or making arrangements with a view to these deals in qualifying cryptoassets. If, for example, person A is a consumer, they are less likely to be carrying on these activities by way of business and/or they may not be holding themselves out as carrying on these activities by way of business, and so may be less likely to need to be authorised or exempt. Readers should have regard to the guidance at PERG 18.8.3 when considering whether their activities amount to dealing in qualifying cryptoassets (as principal or as agent), and PERG 18.8.4 regarding arranging deals in qualifying cryptoassets.

Cryptoasset lending and borrowing arrangements may also involve the regulated activity of safeguarding cryptoassets or arranging cryptoasset safeguarding – for example, where person B safeguards the qualifying cryptoassets ‘lent’ to them or the collateral held, where the collateral is made up of qualifying cryptoassets or relevant specified investment cryptoassets. Readers should also have regard to the guidance at PERG 18.6 when considering whether their activities amount to safeguarding cryptoassets or arranging cryptoasset safeguarding.

Where the activity is within the scope of the dealing in qualifying cryptoassets (as principal or agent) activity or the arranging deals in qualifying cryptoassets activity, the exclusions applicable to those activities may be relevant. This is also true for the safeguarding cryptoassets and arranging cryptoasset safeguarding activities, in respect of which certain exclusions may be available.

There may be other models, however, that operate differently and so would have different implications as far as the perimeter is concerned, as they engage additional or other regulated activities. A case-by-case assessment is always required.

For example, there may be arrangements that are described as lending and involve forms of margin trading. Those persons offering such types of arrangement should consider PERG 2.6 and PERG 13.4 and whether the arrangements could involve another type of specified investment, like a derivative, and may therefore engage other regulated activities for which permission may be required.

Question 9.2: Is cryptoasset lending or borrowing different from regulated credit?

As explained in PERG 18.9.1, qualifying cryptoasset lending or borrowing are not distinct regulated cryptoasset activities in their own right, but they will typically amount to dealing in qualifying cryptoassets (as principal or agent) or arranging deals in qualifying cryptoassets by virtue of involving the disposal and acquisition of qualifying cryptoassets, concluded or arranged by the relevant parties. Viewed holistically, the disposal and subsequent acquisition of the qualifying cryptoassets may resemble a loan, and may be called ‘lending’ or ‘borrowing’, but the appropriate legal characterisation depends on the substance of the arrangements and the role performed by the relevant parties.

The conclusion or arrangement of a transaction that is properly characterised as a deal is fundamentally different to the provision of credit. Where cryptoasset lending or borrowing involves dealing, it is very unlikely to constitute or involve consumer credit lending, which is about the provision of credit, not dealing.

Ultimately, however, whether a lending or borrowing arrangement involving cryptoassets constitutes consumer credit lending will depend on the specific legal and commercial structure of the arrangement, as well as the nature of the parties involved.