May 13 (Reuters) - Zest Protocol, a bitcoin lending

startup with just six employees, has secured $3.5 million in a

funding round led by billionaire investor Tim Draper.

Besides venture capital firm Draper Associates, nearly a

dozen investors participated in the round, including Binance

Labs and Flow Traders, the company said on Monday.

WHY IT'S IMPORTANT

The funding round marks confidence building up in the crypto

lending industry amid a crackdown from the U.S. Securities and

Exchange Commission.

Zest operates differently than the firms targeted by the

regulator, its founder Tycho Onnasch said. While most such

lending platforms operated as a financial institution, Zest is

decentralized, he said.

Decentralized firms allow peer-to-peer transactions without

the need for an intermediary.

CONTEXT

Zest will allow users to lend out their bitcoin, or borrow

against it. Users can avoid selling their bitcoin and instead

earn a passive income from it.

The company will use the funds to roll out the platform more

broadly later this year.

Onnasch said the yield-generating strategy is "very

conservative", suggesting the company will adopt a more mature

approach compared to peers that offered yields as high as 20%

during the Wild West era of crypto.

Draper Associates was founded in 1985 by Tim Draper, a

prominent Silicon Valley venture capitalist who has also

invested in SpaceX, Tesla and Coinbase.

KEY QUOTES

"I don't want to just hold bitcoin - I want to use it,"

Draper said in a statement. "I've ran many experiments to deploy

bitcoin productively, but it hasn't been easy."

"Bitcoin is becoming an institutional asset. There's a

bitcoin economy that is emerging," Onnasch said in an interview.