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

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

Three Arrows has just been hit by the collapse of cryptocurrency Terra, raising doubts about its ability to repay. This was a concern for Blockchain.com because it did not take collateral to get the loan, court documents show.

“It’s time-sensitive, so if you’re free, let’s sort it out,” Odell said of the repayments.

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Zhao seemed speechless.

“Yo,” he replied.

“Uh”

“Well”

Three Arrows filed for bankruptcy in July, and Blockchain.com told Reuters it had not recovered a penny of the loan. The text exchange is one of the sworn documents that liquidators submit in hedge fund liquidation proceedings.read more

Three Arrows did not respond to a request for comment. Odell declined to comment, while Reuters could not reach Zhao.

The loan is part of an opaque network of unsecured loans between crypto companies, according to a Reuters review of bankruptcy court and regulatory filings and interviews with about 20 executives and experts, when cryptocurrency prices plummeted 50 percent earlier this year. %, the industry is exposed to risk.

Institutional crypto lending involves lending cryptocurrencies as well as cash in exchange for yield. By exempting borrowers from the requirement to provide collateral — such as stocks, bonds, or more commonly other crypto tokens — lenders can charge higher interest rates and increase profits, while borrowers can generate cash quickly.

Blockchain.com has since essentially halted its unsecured lending, which accounts for 10 percent of its revenue, Chief Commercial Officer Lane Kasselman told Reuters. “We are reluctant to take the same level of risk,” he said, although he added that under certain conditions the company would still make “extremely limited” unsecured loans to top customers.

According to a review of documents and interviews, unsecured lending has become common across the crypto industry. Despite the recent reshuffle, many in the industry say the practice is likely to continue and even grow.

The crypto industry is actually seeing a trend toward unsecured lending in general, according to Alex Biry, chief analysis officer at S&P Global Ratings Financial. He added that the fact that crypto is a “centralized ecosystem” increases the risk of contagion across the industry.

“So if you’re only lending to people who operate in this ecosystem, especially with a relatively limited number of those counterparties, yes, you’re going to see events like what we just saw,” He said of the lender of the summer meltdown.

The boom and bust of cryptocurrencies

Crypto lenders, the de facto banks of the crypto world, have thrived during the pandemic, attracting retail customers with double-digit rates in exchange for their crypto deposits. Institutional investors, such as hedge funds, on the other hand, want to make leveraged bets, paying higher interest rates to borrow money from lenders who profit from the difference.read more

Crypto lenders don’t need to hold capital or liquidity buffers like traditional lenders, and some find themselves exposed when collateral shortages force them — and their clients — to take huge losses.read more

Voyager Digital was one of the biggest casualties of the summer when it filed for bankruptcy in July, providing 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 about $2 billion in March 2022, and of that $2 billion, it has only Got 11% collateral.

The lender collapsed after Three Arrows defaulted on crypto loans worth more than $650 million at the time. Although neither side said whether the loan was unsecured, Voyager did not report liquidation of any defaulted collateral, while Three Arrows listed the status of its collateral with Voyager as “unknown,” according to the companies’ bankruptcy filings.read more

Voyager declined to comment for this article.

Rival Celsius Network, which also filed for bankruptcy in July, also made unsecured loans, court documents show, but Reuters could not determine the size.

Since most loans are private, the number of unsecured loans across the industry is unknown, and even those involved in the business have given wildly different estimates.

For example, cryptocurrency research firm Arkham Intelligence put the figure at around $10 billion, while cryptocurrency lender TrueFi said it was at least $25 billion.

Antoni Trenchev, co-founder of cryptocurrency lender Nexo, said his firm has rejected requests for unsecured loans from funds and traders. He estimates that unsecured lending across the industry “could be in the hundreds of billions of dollars.”

optimistic about borrowing

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

Most of the 11 lenders interviewed by Reuters said they would still offer unsecured loans, although they did not specify how much this would account for their loan books.

Joe Hickey, global head of trading at major cryptocurrency lender BlockFi, said it will continue its practice of offering unsecured loans only to its top financially audited clients.

A third of BlockFi’s $1.8 billion in loans was unsecured as of June 30, according to the company, which was bailed out by cryptocurrency exchange FTX in July, when it cited loan losses and customer withdrawals Increase.read more

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

Additionally, a growing number of smaller peer-to-peer lending platforms are looking to fill the void 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 went bust, but things have since normalized and lenders are now again comfortable with unsecured lending.

Executives at two other P2P lenders, TrueFi and Atlendis, said they saw increased demand as market makers continued to seek unsecured loans.

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

This would include, for example, companies looking to acquire or fund expansion, rather than focusing on those that trade on leverage on cryptocurrency prices, he added.

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

million dollar bitcoin

To be sure, many crypto loans are secured. Even so, though, collateral is often in the form of volatile tokens that quickly lose value.

BlockFi’s CEO, Zach Prince, said in a July tweet that BlockFi overcollateralized Three Arrows and still lost $80 million. BlockFi said its loans to hedge funds are secured with a basket of crypto tokens and shares in a bitcoin trust.

Daniel Besikof, partner at Loeb & Loeb, said: “More traditional lenders may want more than full collateral coverage for loans backed by cryptocurrencies, as the value of collateral can fluctuate by 20% or more on any given day. More.” Bankruptcy.

“Lending with $1 million in bitcoin is riskier than lending with more traditional, stable collateral.”