Returns on Crypto Assets: The Hidden Message

Noelle Acheson is a veteran of company analysis and member of CoinDesk’s product team.

The following article originally appeared in Institutional Crypto by CoinDesk, a newsletter for the institutional market, with news and views on crypto infrastructure delivered every Tuesday. Sign up here.

For those of us in the northern hemisphere, April is traditionally the month when the furious subterranean growth during the winter months finally breaks through in the form of the first buds of spring.

The crypto world does not move to such a predictable rhythm, however, and the building during the bear market has yet to show substantive signs of flowering. Yet, unruly shoots are starting to emerge in unexpected forms.

The past couple of weeks have seen a flurry of headlines proclaiming a relatively new type of crypto asset return: income, not from trading or realizing profits, but from just holding the cryptocurrencies and tokens.

Coinbase announced that it will start to offer staking services (in which tokens are deposited in order to participate in network maintenance) for institutional clients that hold XTZ, the native token of the tezos blockchain, which should earn holders a net return of over 6 percent. And Battlestar Capital has partnered with crypto lender Celsius to launch a staking network, which will handle proof-of-stake token deposits offering returns of between 5 percent and 30 percent.

We also have the growing attention paid to returns from crypto loans, evidenced by the inflow of $25 million-worth of crypto in just two weeks into BlockFi’s interest-bearing crypto accounts. TrueUSD stablecoin holders can earn up to 8 percent on tokens deposited with crypto lender Cred for a minimum of 6 months. And the Universal Protocol Alliance – a group comprised of exchange Bittrex, crypto lender Cred and others – is launching a euro-backed stablecoin that can be deposited for a return of 8 percent.

Yield, interest, dividends, rewards – whatever you want to call them (the crypto sector is notorious for its confusing vocabulary), they reveal two divergent characteristics of the crypto asset space.

Unexpected returns

First, they hint at the sector’s increasing maturity. While investors have by no means given up on the potential for price appreciation, it is interesting to note the growing focus on other sources of return.

Devising yield strategies is common in more stable investment assets; in crypto, it feels new.

Second, they add layers to the well-entrenched regulatory confusion over what these underlying assets are.
Interest-bearing accounts traditionally fall under the purview of banking authorities. Cryptoassets don’t. So who would regulate crypto asset interest-bearing accounts?

BlockFi offers interest on deposited bitcoin and ether. Both have been designated commodities by the CFTC, which regulates commodity-based derivatives – not commodity-based yields.

Much at stake

Let’s consider the business push behind reward management for proof-of-stake tokens, such as the Coinbase and Battlestar announcements.

Could staking rewards be considered “expectation of profit,” especially when the returns are advertised as such? If so, wouldn’t that nudge the tokens toward the definition of a security?

When it comes to stablecoins things get even more confusing.

The promised TrueUSD and euro-backed stablecoin returns could add fuel to the quietly simmering debate that even coins designed to not produce capital appreciation could still be considered securities. Should that happen, their intended use as transaction tokens could be compromised.

Both hands

So, on the one hand, the focus on yield implies a growing maturity and could entice new investors in as the dovish stance of central banks perpetuates the dearth of income elsewhere. This is positive.

On the other hand, the deepening layers of complexity highlight not only the lack of comprehensive and reassuring regulation but also the hard task ahead for regulators struggling to adapt old rules to new products. Furthermore, the rush to launch differentiated services with enticing yields is bound to attract the regulators’ attention, especially with services aimed at the retail market.

I’m not a lawyer and I’m sure there are many nuances and qualifications that I’m overlooking – but I am willing to bet that even lawyers don’t know for sure how this will play out.

I’m also willing to bet that most of us can agree on one thing: the more confusing this gets, the more interesting it becomes.

Encryption machine image via Shutterstock