What crisis? High-stakes crypto loans seem to be here to stay

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

Three Arrows had just taken a hit from the collapse of the Terra cryptocurrency, which raised doubts about its ability to repay. This was a concern for Blockchain.com because it had not taken collateral to secure the loan, according to court documents.

“It’s urgent, so let’s find out if you’re available,” Odell said of the refund.

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Zhao seemed at a loss for words.

“Yeah,” he replied.

“uh”

“Hmm”

Three Arrows filed for bankruptcy in July, and Blockchain.com told Reuters it has yet to recover a penny of its loan. The text exchange is among the sworn documents filed by the liquidators as part of the hedge fund’s liquidation proceedings. 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 crypto companies that left the industry exposed when cryptocurrency prices plunged 50% earlier this year, according to a Reuters review of the court. experts.

Institutional crypto lending is the lending of cryptocurrencies as well as cash in exchange for a return. By waiving the requirement that the borrower provide collateral – such as stocks, bonds or, more commonly, other crypto-tokens – lenders can charge higher interest rates and increase profits, while borrowers can quickly generate cash.

Blockchain.com has since largely ceased unsecured lending, which accounted for 10% of its revenue, Chief Commercial Officer Lane Kasselman told Reuters. “We are not willing to take on the same level of risk,” he said, although he added that the company would still offer “extremely limited” unsecured loans to the best customers under certain conditions.

Unsecured loans have become mainstream in the crypto industry, according to review of applications and interviews. Despite the latest pushback, many industry insiders have said the practice is likely to continue and perhaps even grow.

Alex Birry, director of financial institutions analytics at S&P Global Ratings, said the crypto industry is actually seeing a general trend toward unsecured loans. The fact that crypto is a “concentrated ecosystem” has increased the risk of contagion across the sector, he added.

“So if you’re only lending to people who operate in that ecosystem, and especially if the number of those counterparties is relatively small, then yes, you’re going to see events like the one we just saw,” he said of this summer’s meltdown of lenders .

CRYPTO BOOM AND BUST

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

Crypto lenders are not required to hold capital or liquidity reserves like traditional lenders, and some have found themselves exposed when a lack of collateral has forced them – and their customers – to bear significant 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 about $2 billion in March 2022, and only 11% of the $2 billion required collateral.dollars, according to the company’s regulatory filings.

The lender collapsed after Three Arrows defaulted on a crypto loan of over $650 million at the time. While neither party said whether that loan was unsecured, Voyager reported not having liquidated collateral in the event of default, while Three Arrows said its collateral status with Voyager was “unknown,” according to the companies’ bankruptcy filings. Read more

Voyager declined to comment for this article.

Rival lender Celsius Network, which also filed for bankruptcy in July, also offered unsecured loans, according to court documents, although Reuters could not determine the extent.

Since most loans are private, the amount of unsecured loans in the industry is unknown, even those involved in the business give widely varying estimates.

Crypto research firm Arkham Intelligence, for example, put the figure at around $10 billion, while crypto lender TrueFi said at least $25 billion.

Antoni Trenchev, co-founder of crypto lender Nexo, said his company has turned down requests for funds and merchants asking for unsecured loans. He estimated that unsecured lending in the industry was “probably in the hundreds of billions of dollars”.

BULLISH ON LOANS

While Blockchain.com has largely backed away from unsecured lending, many crypto lenders remain confident in the practice.

Most of the 11 lenders polled by Reuters said they would still provide unsecured loans, although they did not specify the size of their loan portfolio.

Joe Hickey, global head of trading at BlockFi, a major crypto lender, said he would continue his practice of offering unsecured loans only to the best customers for whom he had seen audited financials.

A third of BlockFi’s $1.8 billion in loans were unsecured as of June 30, according to the company, which was bailed out by crypto exchange FTX in July, when it cited a loss on a loan and an increase in customer withdrawals. Read more

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

In addition, a growing number of smaller peer-to-peer lending platforms are seeking 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’ insolvency, but conditions have since normalized and lenders are comfortable lending without collateral again.

Executives from two other peer-to-peer lenders, TrueFi and Atledis, said they saw an increase in 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 that lenders will do better by lending to a more diverse range of crypto businesses.

For example, it would include companies looking to make acquisitions or finance expansion, he added, rather than focusing on those trading crypto prices.

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

MILLION DOLLARS BITCOIN

Granted, many crypto loans are safe. Even then, however, security often comes in the form of volatile tokens that can quickly lose value.

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

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

“Lending a million dollars against a million dollars worth of bitcoins is riskier than borrowing against more traditional and stable security.”

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Reporting 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 money generating “Web3”.

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