Despite the crisis, risky crypto lending has taken hold

In an instant message to Edward Zhao at Three Arrows Capital on May 11, Scott Odell, an analyst at British crypto lender Blockchain.com, said at least part of a $270 million loan to a Singaporean hedge fund. requested to be repaid. The collapse of cryptocurrency Terra recently cost Three Arrows money, casting uncertainty over its solvency. Blockchain.com did not use collateral to secure the loan, according to court documents , was concerned about this.

Regarding refunds, O’Dell said, “This is time-sensitive, so let’s sort it out if we can afford it.” Zhao didn’t know what to say.

In July, Three Arrows declared bankruptcy and, according to Blockchain.com, has not recovered a single cent on the loan. One of the affidavits filed by the liquidator as part of the hedge fund liquidation process is a text exchange.

When contacted for comment, Three Arrows did not provide any. Zhao was not accessible and Odell declined to comment.

The loan exposed the industry when cryptocurrency prices fell 50% earlier this year, according to a Reuters review of bankruptcy court and regulator records and interviews with nearly 20 executives and experts. , was part of a dark network of unsecured loans among cryptocurrency businesses.

Institutional crypto lending lends both cash and crypto in exchange for a yield. Lenders can charge higher interest rates and increase profits by waiving the requirement that borrowers post collateral such as stocks, bonds, or more often other crypto tokens, allowing borrowers to cash out quickly. you can earn

According to Chief Business Officer Lane Casselman, Blockchain.com has now largely stopped unsecured loans, which accounted for 10% of its revenue. “We are not going to participate in the same amount of risk,” he said, but that under certain circumstances he will continue to offer “very limited” unsecured loans to his most valuable customers. Added.

A survey of filings and interviews shows that unsecured lending has become commonplace across the cryptocurrency sector. Despite the recent upheaval, some experts in the field predict that the practice will likely continue and even expand.

Alex Birry, Chief Analytics Officer for Financial Institutions at S&P Global Ratings, says unsecured lending is growing in popularity in the crypto industry. He noted that cryptocurrency’s “centred environment” has increased the risk of contagion within the industry.

He said of Lender’s Summer Collapse: ”

crypto up and down waves

During the pandemic, crypto lenders, the de facto banks of the crypto industry, exploded, attracting regular customers with double-digit rates in exchange for crypto deposits. When institutional investors, such as hedge funds, who wanted to place leveraged bets, paid higher interest rates to borrow money from them, lenders made a profit on the difference.

Unlike traditional lenders, cryptocurrency lenders are not obliged to maintain capital or liquidity buffers, and should they and their customers suffer significant losses due to a lack of collateral, I realized that I was in danger.

Voyager Digital, which declared bankruptcy in July and was one of the summer’s biggest victims, offers its take on the explosive growth of unsecured crypto lending. The New Jersey-based lender’s book of crypto loans increased from $380 million in March 2021 to nearly $2 billion in March 2022, according to the company’s regulatory filings. And that $2 billion he only needed 11% security.

Lenders went bankrupt after Three Arrows missed payments on a crypto loan worth over $650 million at the time. Voyager has not disclosed any collateral liquidation due to default, and Three Arrows has classified its collateral status with Voyager as “unknown.” Voyager declined to respond to his questions regarding this article.

Competing lender Celsius Network, which declared bankruptcy in July, also offered unsecured loans, but the amounts are unknown, according to court documents. Determining the total value of an unsecured loan is impossible and estimates by people working in the industry vary widely.

For example, cryptocurrency research firm Arkham Intelligence puts the amount at around $10 billion, while cryptocurrency lender TrueFi puts it at at least $25 billion. Antoni Trenchev, co-founder of crypto lender Nexo, has claimed his business has rejected requests for unsecured loans from investors and traders. He said the total amount of unsecured lending in the sector is “probably in the hundreds of billions of dollars.”

Lending scene optimism

Blockchain.com has largely stopped offering unsecured loans, but many crypto lenders are still optimistic about the industry. The majority of the 11 financial institutions interviewed said they offer such loans, although they did not disclose how much of their loan balances would be unsecured.

Key cryptocurrency lender BlockFi will maintain its strategy of only offering unsecured loans to elite customers with verified audited financials, according to Joe Hickey, global head of trading. As of June 30, a third of its $1.8 billion loans were unsecured, according to BlockFi, which was bailed out by crypto exchange FTX in July after blaming losses and increasing customer withdrawals. was.

“I think our risk management process is one of the factors that has helped us avoid a bigger credit event,” said Hickey. Additionally, a growing number of his smaller P2P lending platforms are trying to fill the void left by the exits of big companies like Voyager and Celsius.

Institutional crypto lenders were more cautious after the Three Arrows bankruptcy, but things have since stabilized, according to Sid Powell, co-founder and CEO of unsecured crypto lending platform Maple. Lenders are once again comfortable with unsecured loans, according to Reuters.

Executives at two other peer-to-peer lenders, TrueFi and Atlendis, said continued demand from market makers for unsecured loans has led to increased demand. Brent Xu, CEO of another peer-to-peer platform, Umee, predicted that the crypto industry will learn from its mistakes and that lenders will benefit from providing loans to various crypto businesses.

He said rather than focus on people making leveraged trades on cryptocurrency prices. Examples include companies looking to acquire or raise capital. On unsecured borrowing and lending, Xu expressed strong optimism.

pile of money

Undoubtedly, many crypto loans have security. However, even then, the collateral usually takes the form of temporary tokens with short lifespans.

BlockFi CEO Zac Prince tweeted in July claiming that lenders overcollateralized a loan to Three Arrows and still lost $80 million. BlockFi claimed that the loans it provided to hedge funds were backed by a series of cryptocurrency tokens and shares in a Bitcoin trust.

In the same week, news of 3AC spread more fear in the market. We were one of the first companies to fully accelerate an overcollateralized loan to 3AC, liquidate and hedge all collateral, and experienced losses of approximately $80 million. This is part of the loss reported by others.

— Zac Prince (@BlockFiZac) July 1, 2022

According to Daniel Besikof, partner at bankruptcy specialist Loeb & Loeb, “The more traditional lenders will certainly need more than full collateral coverage for their crypto-backed loans. More.” “Lending $1 million against $1 million bitcoin is riskier than lending against more traditional and stable collateral,” he added.

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