HomeBusinessWhat's the crisis? High-stakes crypto lending looks here to stay

What’s the crisis? High-stakes crypto lending looks here to stay

What's the crisis?  High-stakes crypto lending looks here to stay


On May 11, Scott Odell, an analyst at British crypto lender Blockchain.com, sent an urgent message to Edward Zhao of Three Arrows Capital asking the Singapore hedge fund to repay at least part of the $270 million loan.

Three Arrows had just taken a hit from the collapse of the cryptocurrency Terra, raising doubts about its ability to repay. This was a concern for Blockchain.com because it did not take collateral to secure the loan, court filings show.

Odell said of the repayment, “It’s time-sensitive, so sort it out if you have one.”

Zhao appeared lost for words.

“Yo,” she replied.



Three Arrows filed for bankruptcy in July and Blockchain.com told Reuters it had yet to recover a percentage of its debt. The text is one of the affidavit documents filed by the liquidator as part of the exchange hedge fund’s liquidation proceedings.

Three Arrows did not respond to requests for comment. Odell declined to comment, while Reuters was unable to reach Zhao.

According to a Reuters review of bankruptcy court and regulatory filings and interviews with nearly 20 executives and experts, the loan was part of an opaque web of unsecured lending among crypto companies that led to a 50% drop in cryptocurrency prices earlier this year. The reason was exposed to the industry.

Institutional crypto lending involves giving cash as well as cryptocurrency in exchange for a yield. By eliminating the need for the borrower to hold collateral – such as stocks, bonds or more commonly other crypto tokens – lenders can charge higher rates and increase profits, while the borrower can generate cash quickly.

Chief Business Officer Len Castleman told Reuters that Blockchain.com has largely closed its unsecured lending, which represents 10% of its revenue. “We are not prepared to engage in the same level of risk,” he said, although he added that the company will still offer “extremely limited” unsecured loans to top customers under certain conditions.

According to review filings and interviews, unsecured lending has become commonplace in the crypto industry. Despite the recent setbacks, several industry insiders said the practice is likely to continue and may go on.

Alex Birri, chief analytical officer for financial institutions at S&P Global Ratings, said the crypto industry was indeed seeing the trend of unsecured lending widely. The fact that crypto was a “focused ecosystem” raised the risk of contagion across the region, he said.

“So if you’re only lending to people who work in this ecosystem, and especially if the number of these counterparties is relatively limited, then yes, you’ll see events like the ones we just saw,” he said during the summer. Said lenders about the collapse.

crypto boom and bust

Cryptocurrency lenders, the de facto banks of the crypto world, grew rapidly during the pandemic, attracting retail customers with double-digit rates in return for their cryptocurrency deposits. On the other hand, institutional investors such as hedge funds looking to place leveraged bets pay higher rates to borrow money from lenders who profited from the difference.

Crypto lenders are not required to have a capital or liquidity buffer like traditional lenders and some found themselves exposed when a lack of collateral forced them – and their clients – to incur large losses.

Voyager Digital, which became one of the biggest casualties of the summer when it filed for bankruptcy in July, offers a window into the rapid growth of unsecured crypto lending.

The New Jersey-based lender’s crypto loan book grew from $380 million in March 2021 to nearly $2 billion in March 2022, and it took collateral for only 11% of that $2 billion, the company’s regulatory filings show.

The lender collapsed after Three Arrows defaulted on a crypto loan of over $650 million at the time. Although neither party said whether the loan was unsecured, Voyager did not report liquidation of any collateral upon default, while Three Arrows listed its collateral position with Voyager as “unknown”, Shows bankruptcy filings of companies.

Voyager declined to comment for this article.

Rival lender Celsius Network, which also filed for bankruptcy in July, also offered unsecured loans, court filings show, although Reuters could not ascertain the scale.

Since most loans are private, the amount of unsecured lending is unknown across the industry, with even those involved in the business giving wildly different estimates.

For example, crypto research firm Arkham Intelligence put the figure in the region of $10 billion, while crypto lender TruFi said at least $25 billion.

Antoine Trenchev, co-founder of crypto lender Nexo, said that his company had turned down requests for funds and merchants seeking unsecured loans. He estimated that the uncollateralized debt was “probably in the hundreds of billions of dollars” across the industry.

bullish on borrowing

While Blockchain.com has largely pulled back from unsecured lending, many crypto lenders remain confident about the practice.

Most of the 11 lenders interviewed by Reuters said they would still provide uncollateralized loans, although they did not specify how much of their loan book it would be.

Joe Hickey, global head of trading at BlockFi, a leading crypto lender, said it would continue its practice of offering unsecured loans only to top customers for whom it looked at audited financials.

According to the company, $1.8 billion of BlockFi’s loans were unsecured as of June 30, which was bailed out by crypto exchange FTX in July, when it cited losses on loans and increased customer withdrawals.

“I think our risk-management process was one of the things that saved us from any major credit event,” Hickey said.

In addition, a growing number of smaller, peer-to-peer lending platforms are trying to fill the gap left by the exit of centralized players such as Voyager and Celsius.

Sid Powell, co-founder and CEO of unsecured crypto lending platform Maple, said institutional crypto lenders were more cautious after Three Arrows bankruptcy, but conditions have returned to normal and lenders are now comfortable with unsecured lending again.

Executives at two other peer-to-peer lenders, TruFi and Atlendis, said they have seen an increase in demand as market makers continue to look for unsecured loans.

Brent Xu, CEO of Umi, another peer-to-peer platform, said that the crypto industry will learn from its mistakes, and that lenders will do better by lending to a more diverse range of crypto companies.

For example, this would include firms looking to acquire or expand, rather than focusing on those trading leveraged on crypto prices.

“I am very optimistic on the future of unsecured lending and lending,” Xu said.

million dollars of bitcoin

To be sure, many crypto loans are secured. Still, however, the collateral is often in the form of volatile tokens that can quickly lose value.

In a tweet in July, the lender’s CEO, Zack Prince, said that BlockFi over-collateralized loans for Three Arrows, but still lost $80 million on it. BlockFi said its lending to the hedge fund was secured in a bitcoin trust with a basket of crypto tokens and shares.

“More traditional lenders want more than full collateral coverage on loans backed by crypto, as the collateral value can increase by 20% or more on any given day,” said Daniel Besikoff, partner at Loeb & Loeb. bankruptcy.

“Lending a million dollars against a million dollars of bitcoin is riskier than lending against more traditional, stable collateral.”

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)



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