What crisis? High-risk cryptocurrency lending seems here to stay

LONDON / WASHINGTON, Sept. 21 (Reuters) – On May 11, Scott Odell, an analyst at British cryptocurrency lender Blockchain.com, sent an instant message to Edward Zhao of Three Arrows Capital demanding that the Singapore hedge fund at least repay. a portion of a $ 270 million loan.

Three Arrows had just taken a blow from the collapse of cryptocurrency Terra, raising doubts about its ability to pay back. This was a concern for Blockchain.com as it had not taken collateral to secure the loan, court documents show.

“This is time sensitive, so we’ll sort it out if you’re available,” Odell said of the refund.

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Zhao seemed speechless.

“Yo,” he replied.

“huh”

“Hmm”

Three Arrows filed for bankruptcy in July, and Blockchain.com told Reuters it had yet to recover one cent of its loan. The exchange of texts is among the affidavits filed by the liquidators as part of the liquidation procedure of the hedge fund. Read more

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

The loan was part of an opaque web of unsecured lending between cryptocurrency companies that left the industry exposed when cryptocurrency prices plunged 50% earlier this year, according to a Reuters bankruptcy court review and statements. regulations and interviews with about 20 managers and experts.

Institutional cryptocurrency lending involves lending cryptocurrencies and cash in exchange for a yield. By waiving the obligation for the borrower to provide collateral, such as stocks, bonds, or more commonly other crypto tokens, lenders can charge higher rates and increase profits, while borrowers can generate money quickly.

Blockchain.com has since largely ceased its unsecured lending, which had accounted for 10% of its revenue, chief business officer Lane Kasselman told Reuters. “We are not willing to commit to the same level of risk,” he said, though he added that the company will still offer “extremely limited” unsecured loans to top clients under certain conditions.

Unsecured loans have become common in the cryptocurrency industry, according to the review of documents and interviews. Despite the recent shakeout, many industry insiders have said the practice is likely to continue and may even grow.

Alex Birry, Chief Analytical Officer for Financial Institutions at S&P Global Ratings, said the cryptocurrency industry is indeed seeing a trend towards unsecured lending. The fact that cryptocurrencies were a “concentrated ecosystem” increased the risk of contagion across the industry, he added.

“So if you only lend to people operating in this ecosystem, and especially if the number of these counterparties is relatively small, yes, you will see events like the one we just saw,” he said of the summer crash of lenders.

BOOM AND CRYPTUS BUST

Cryptocurrency lenders, the de facto banks of the cryptocurrency world, exploded during the pandemic, attracting retail customers with double-digit rates in exchange for their cryptocurrency deposits. On the other hand, institutional investors such as hedge funds looking to make leveraged bets have paid higher rates to borrow funds from lenders, who profited from the difference. Read more

Cryptocurrency lenders are not required to hold capital or cash reserves like traditional lenders, and some found themselves exposed when a shortage of collateral forced them – and their clients – to incur large losses. Read more

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 loans.

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

The lender collapsed after Three Arrows defaulted on a crypto loan worth over $ 650 million at the time. Although neither party has stated whether this loan was unsecured, Voyager has not reported the liquidation of any collateral for default, while Three Arrows has listed its collateral status with Voyager as “unknown,” they show bankruptcy filings. society. Read more

Voyager declined to comment on this article.

Rival lender Celsius Network, which filed for bankruptcy in July, also offered unsecured loans, although Reuters was unable to ascertain this.

As most of the loans are private, the amount of unsecured loans across the industry is unknown, with very different estimates even from those involved in the business.

Cryptocurrency research firm Arkham Intelligence has estimated the figure in the region at $ 10 billion, for example, while cryptocurrency lender TrueFi has declared at least $ 25 billion.

Antoni Trenchev, co-founder of cryptocurrency lender Nexo, said his company turned down requests for funds and traders seeking unsecured loans. He estimated that unsecured loans across the industry were “probably in the hundreds of billions of dollars”.

BULLISH ON LOAN

While Blockchain.com has largely pulled out of unsecured lending, many cryptocurrency lenders remain confident in the practice.

Most of the 11 lenders surveyed by Reuters said they would continue to provide unsecured loans, although they did not specify the amount of their loan portfolio.

Joe Hickey, Global Head of Trading at BlockFi, a major cryptocurrency lender, said he will continue his practice of offering unsecured loans only to the best clients for whom he had seen audited financial data.

One-third of BlockFi’s $ 1.8 billion loans were unsecured as of June 30, according to the company, which was bailed out by cryptocurrency exchange FTX in July when it cited losses on a loan and increased returns. customer withdrawals. Read more

“I think our risk management process was one of the things that saved us from having bigger credit events,” Hickey said.

Additionally, a growing number of smaller peer-to-peer lending platforms are trying to fill the void left by the exit of centralized players like Voyager and Celsius.

Sid Powell, co-founder and CEO of the unsecured crypto lending platform Maple, said institutional cryptocurrency lenders were more cautious after Three Arrows’ insolvency, but conditions have since normalized and lenders are now down. new at ease in unsecured lending.

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

Brent Xu, CEO of Umee, another peer-to-peer platform, said the cryptocurrency industry would learn from its mistakes and that lenders would fare better by extending loans to a more diverse range of crypto companies.

For example, this would include companies looking to make acquisitions or finance expansion, he added, rather than focusing on those that leverage cryptocurrency prices.

“I am very optimistic about the future of loans and unsecured loans,” Xu said.

MILLION DOLLARS OF BITCOIN

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

BlockFi over-collateralized a loan to Three Arrows but still lost $ 80 million on it, lender CEO Zac Prince said in a tweet in July. BlockFi said its hedge fund loan was secured with a basket of crypto tokens and shares in a bitcoin trust.

“A more traditional lender would probably want more than full collateral coverage on a cryptocurrency backed loan, because the collateral value could fluctuate 20% or more on any given day,” said Daniel Besikof, partner at Loeb & Loeb. working in bankruptcy.

“Lending a million dollars against a million dollars worth of bitcoin is more risky than lending against more traditional and stable collateral.”

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Reportage by Elizabeth Howcroft in London and Hannah Lang in Washington; Editing by Michelle Price and Pravin Char

Our Standards: Thomson Reuters Trust Principles.

Elizabeth Howcroft

Thomson Reuters

Reports on the intersection of finance and technology, including cryptocurrencies, NFTs, virtual worlds and the money that drives “Web3”.

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