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With high interest rates for crypto loans, I'm currently thinking of lending out my cryptocurrency on a crypto lending platform like Celsius Network. However, I'm not too sure about the implications of lending out crypto. First, is the interest treated differently than normal interest I would earn from a savings account? Would I need to register with FinCEN? Also, would lending out crypto on a lending platform make me an MSB?

I ask about MSB because when I signed up for a crypto wallet, my bank sent me a form asking if I was running an MSB (Money Services Business). They literally shut down my bank account until I filled out the form stating that I had opened the crypto wallet to trade crypto for personal investment purposes.

Anyways, I want to know if there is anything more to crypto lending other than putting in my tokens and collecting taxable interest.

Asking about US legal and tax implications.

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  • Sorry, I forgot to add country of residence. I'm asking about the US.
    – ARJ
    Commented Aug 22, 2021 at 2:59
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    One thing for sure is that you're going to have to update that form at the bank...
    – RonJohn
    Commented Aug 22, 2021 at 6:29
  • Why would I have to update the form? Would lending out crypto through a lending platform that offers financial services make me an MSB? What's the difference in doing that compared to simply earning money in a savings account?
    – ARJ
    Commented Aug 22, 2021 at 18:53
  • Would you directly loan the coins, or let someone else be the middleman (EDIT: like Lendingtree)?
    – RonJohn
    Commented Aug 22, 2021 at 21:33
  • It would be like lending tree, expect it would be for crypto. Celsius Network, or the platform I'm planning on lending through, is actually a financial services company. So I would put in my crypto and would receive interest in the form or crypto from the company on a weekly basis.
    – ARJ
    Commented Aug 22, 2021 at 21:48

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You ask in one of your comments "What's the difference in [lending crypto through another 3rd party service] compared to simply earning money in a savings account?" You ask this question as a rhetorical rebuttal to the notion that you might need to inform your bank that the reason you opened your account is different than you initially indicated.

Even just asking this question underlines the real problem with all of this - you don't appear to understand the risk in doing what you are considering. From your perspective, having actual cash in a savings account is a relationship between you and your bank - and your bank is likely to be QUITE a better credit risk than someone borrowing crypto through a 3rd party service. Further, in the unlikely event that your bank ultimately collapses, your savings account is likely insured by your government [whether that is the case / to what limit, will depend on where you live].

If you lend 1 BTC to someone, what are the chances that they can pay you back? I would be incredibly nervous that someone borrowing crypto [instead of regular borrowing] is at a large risk of either gambling funds away, or even just disappearing into the night. Even if they pay you back, what if BTC has a price drop before you get it back? Lending it out removes your liquidity, which is a major risk in an already foolishly-risky asset. Personal lending in itself is quite risky, and adding in to this the risk of Crypto makes this a dubious prospect, at best.

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  • To help visualize, if I borrow $10.000 to buy a car I may reasonably hope to pay back $10.500 next year, and you may check that I have assets to cover it. But if I borrow $10.000 in BTC, maybe next year I need to pay $30.000 to return that amount of BTC and I cannot afford it, and all you can get back is $15.000. Which means that you have lost $15.000 compared to what you would have if you had not borrowed the BTC. Also, if the value of the BTC decreases, you cannot sell it six months from now (say at $7.500) but will have to wait a year to recover a BTC that would then have a value of $5.000.
    – SJuan76
    Commented Aug 24, 2021 at 11:21
  • There are third party intermediaries who facilitate this lending, and protect you from another individual "doing a runner". Sure, these companies are not as secure as major banks, but it is not like if that one person does not pay you are out of pocket. The not being able to sell is a very real issue.
    – Dave
    Commented Aug 24, 2021 at 13:03
  • @Dave Are you suggesting to invest in 'trustless' bitcoin, only to turn around and put your trust in an organization maybe 1% the size of a bank domiciled in your own jurisdiction? Do you see the contradiction in aims?
    – Grade 'Eh' Bacon
    Commented Aug 24, 2021 at 14:28
  • Yes. I am saying your answer makes it sound like you have to trust a single individual "If you lend 1 BTC to someone, what are the chances that they can pay you back?". That is not the case. An organization maybe 1% the size of a bank is more trustworthy than a single stranger, but less trustworthy than a bank. I think you question is generally correct, just that it seems to understate that the Celsius Network provides some level of security.
    – Dave
    Commented Aug 24, 2021 at 14:35
  • @dave So 'Celsius Network' [whoever they are] guarantees your investment made to a 3rd party through their site? Why would they do that? Why would they take on the credit risk when acting only as facilitator? All of this screams poorly informed / bad idea to me.
    – Grade 'Eh' Bacon
    Commented Aug 24, 2021 at 14:38
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With high interest rates for crypto loans, I'm currently thinking of lending out my cryptocurrency on a crypto lending platform like Celsius Network. However, I'm not too sure about the implications

The main implication is the high interest rates mean that the risk is high.

Anyways, I want to know if there is anything more to crypto lending other than putting in my tokens and collecting taxable interest.

Has Celsius Network explained you how do they plan on paying you, say, 1.10 BTC next year for each BTC you give them now? Where will that 0.10 BTC come from (*)? Unlike rabbits, it is not that you put some of them together and then magically more of them appear. They must do something.

Maybe they plan to lend to business who can invest it and to produce extra value to pay for it. But then they are working as a bank, why should they give extra interest? Also, it is very risky for everyone, maybe the business they lend to can repay back the money with %20 more, but, will it be enough to buy your BTC back then?

Maybe they plan to sell your BTC while the price is high and buy back to return yours when the price is low. But they are taking a risk that maybe you are not comfortable with, if they are wrong and the price does not get lower it will be you the one who loses the BTC ("sorry, we explained to you at clause 412.f at page 212 of the contract"). Or maybe it is not in the contract and they promise you "100% guarantee" that you will get your BTC back, and just declare bankruptcy.

Maybe it is just a Ponzi scheme. They will tell everybody that they have so much money, hoping that people won't want it back because everything goes so well.

And of course, apart of the above there is the issue that if the price of your crypto goes down you will not be able to sell it earyly.

(*) Apart from the extra BTC needed to pay for their operation expenses and profits.

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