What crisis? The high-risk cryptocurrency loan appears to be here to stay

London / Washington:

Three Arrows had just suffered the backlash of the collapse of the cryptocurrency Terra, which raised doubts about its ability to repay. Blockchain.com was concerned about the situation because it had not taken collateral to secure the loan, court documents show.

“It’s a matter of time, so let’s see if you’re available,” Odell said of the refund.

Zhao seemed speechless.

“Hey,” he replied.

“ehm”

“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.

Three Arrows did not respond to requests for comment. Odell declined to comment, while Reuters could not 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, a Reuters court review found bankruptcies and regulatory documents and interviews with around 20 executives and experts.

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

Blockchain.com has since largely ceased unsecured lending, which had accounted for 10% of its revenue, chief commercial 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 would still offer “extremely limited” unsecured loans to high-profile clients under certain conditions.

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

Alex Birry, head of financial institution analysis at S&P Global Ratings, said the cryptocurrency industry has actually been largely characterized by a trend towards unsecured lending. The fact that cryptocurrencies are a “concentrated ecosystem” increases 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 lender crash.

CRYPT-CURRENCY BOOM AND COLLAPSE

Cryptocurrency lenders, the de facto banks of the cryptocurrency world, exploded during the pandemic, luring retail clients with double-digit rates in exchange for their cryptocurrency deposits. In return, institutional investors such as hedge funds looking to make leveraged bets paid higher rates to borrow funds from lenders, who profited from the difference.

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 suffer large losses. .

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 according to company regulatory documents it took collateral for just 11%. of that $ 2 billion.

The lender collapsed after Three Arrows defaulted on a cryptocurrency loan worth over $ 650 million at the time. Although neither party claimed that this loan was unsecured, Voyager did not claim to have liquidated the stock following this default, while Three Arrows indicated that the status of its collateral with Voyager was “unknown,” according to the statement by bankruptcy of the company.

Voyager declined to comment on this article.

Rival lender Celsius Network, also filed for bankruptcy in July, also offered unsecured loans, according to court documents, but Reuters was unable to determine the extent.

As most of the loans are private, the amount of unsecured loans in the industry as a whole is unknown and those involved in the industry also provide very different estimates.

Cryptocurrency research firm Arkham Intelligence has estimated the figure at around $ 10 billion, for example, while cryptocurrency lender TrueFi has estimated the figure at 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.”

INCREASE IN DEBTS

Although Blockchain.com has largely withdrawn from unsecured lending, many cryptocurrency lenders remain confident in this practice.

Most of the 11 lenders surveyed by Reuters said they would continue to provide unsecured loans, but did not specify how much that would represent of their loan portfolios.

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

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 customer withdrawals.

“I think our risk management process is 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 withdrawal of centralized operators 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 have been back again. at the limit.

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

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

For example, that would include companies looking to make acquisitions or expand funds, he added, rather than focusing on those trading leveraged cryptocurrencies.

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

MILLION DOLLARS OF BITCOIN

Sure, many crypto loans are secured. But even then, collateral often comes 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 that loan, lender CEO Zac Prince said in a tweet in July. BlockFi said its hedge fund loan was backed by a basket of crypto tokens and stocks in a bitcoin trust.

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

“Lending $ 1 million against $ 1 million in bitcoin is riskier than lending against more traditional and stable collateral. “

(This story was not edited by the blogdudemocrate.org staff and is automatically generated from a syndicated feed.)

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