LONDON/WASHINGTON- Crypto lenders, the de facto banks of the crypto world, boomed during the pandemic, attracting retail customers with double-digit rates in return for their cryptocurrency deposits. On the flip side, institutional investors such as hedge funds looking to make leveraged bets paid higher rates to borrow the funds from the lenders, who profited from the difference.
Crypto lenders are not required to hold capital or liquidity buffers like traditional lenders and some found themselves exposed when a shortage of collateral forced them – and their customers – to shoulder large losses.
Voyager Digital, which became one of the biggest casualties of the summer when it filed for bankruptcy in July, provides 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 around $2 billion in March 2022, and it took collateral for just 11 percent of that $2 billion, the company’s regulatory filings show.
The lender collapsed after Three Arrows defaulted on a crypto loan worth more than $650 million at the time. Although neither party have said if this loan was unsecured, Voyager did not report liquidating any collateral over the default, while Three Arrows listed its collateral status with Voyager as “unknown”, the companies’ bankruptcy filings show.
Voyager declined to comment for this article.
Rival lender Celsius Network, which also filed for bankruptcy in July, offered unsecured loans too, court filings show, although Reuters could not ascertain the scale.
Since most loans are private, the amount of unsecured lending across the industry is unknown, with even those involved in the business giving wildly different estimates.
Crypto research firm Arkham Intelligence put the figure in the region of $10 billion, for instance, while crypto lender TrueFi said at least $25 billion.
Antoni Trenchev, co-founder of crypto lender Nexo, said that his company had turned down requests from funds and traders asking for unsecured loans. He estimated uncollateralized lending across the industry was in the tens of billions of dollars.
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, though they did not specify how much of their loan book this would be.
Joe Hickey, global head of trading at BlockFi, a major crypto lender, said it would continue its practice of offering unsecured loans only to top clients for which it had seen audited financials.
A third of BlockFi’s $1.8 billion loans were unsecured as of June 30, according to the company, which was bailed out by crypto exchange FTX in July, when it cited losses on a loan and increased customer withdrawals.
“I think our risk-management process was one of the things that saved us from having any bigger credit events,” Hickey said. – Reuters
