Here’s what you need to know about cryptocurrency lending – a corner of the digital asset market that has exploded over the past couple of years amid soaring interest in cryptocurrencies.
WHAT IS THE ISSUE?
Cryptocurrency lending is essentially a bank – for the cryptocurrency world.
Just as customers of traditional banks earn interest on their savings in dollars or pounds, cryptocurrency users who deposit their bitcoin or their thea with cryptocurrency creditors also earn money, usually in cryptocurrencies.
While savings in traditional banks offer paltry returns due to historically low interest rates, cryptocurrency lenders offer much higher returns – up to 20% in the best case, although rates depend on the tokens deposited.
Creditors of cryptocurrencies earn money by lending – also for a fee, usually between 5% and 10% – digital tokens from investors or cryptocurrency companies, who can use the tokens to speculate, cover or as working capital. Creditors profit from the difference between the interest they pay on deposits and that charged on loans.
HIGH YIELDS? Creditors of cryptocurrencies must therefore be popular.
Cryptocurrency lending has seen a real boom over the past two years, as have decentralized finance, or “DeFi” platforms. Both DeFi and crypto-lending tout a vision of financial services where creditors and borrowers bypass traditional financial firms that act as gatekeepers for loans or other products.
The sites claim they are also easier to access than banks, with potential customers facing less paperwork when lending or borrowing cryptocurrencies.
The total value of cryptocurrencies on DeFi sites soared to an all-time high of $110 billion in November, five times more than a year ago, reflecting bitcoin’s all-time highs, according to the DeFi Pulse sector site.
Traditional investors and venture capitalists, from Canada’s second largest pension fund, Caisse de Dpt et Placement du Qubec, Bain Capital Ventures, have backed cryptocurrency lending platforms.
IS THERE A FREELANCE?
There are several of them.
Unlike traditional regulated banks, cryptocurrency creditors are not overseen by financial regulators – so there are few rules about how much capital they must hold, or how transparent their reserves are.
This means that customers who hold their crypto on the platforms could lose access to their funds – as happened with Celsius on Monday.
Cryptocurrency creditors also face other risks, from volatility in cryptocurrency markets that can affect the value of savings to technology failures and hacks.
WHO ARE THE GREATEST ACTORS?
New Jersey-based Celsius is one of them, with over $11 billion in assets on its platform.
Other major creditors are also based in the United States. New York-based Genesis granted $44.3 billion in loans in the first quarter, with $14.6 billion in active loans in March.
Other big names include US creditor BlockFi, which has some $10 billion in assets under management, and London-based Nexo, which has $12 billion.
SHOULD REGULATORS BE WORRIED?
Crypto lenders are in the crosshairs of US securities watchdogs and state regulators, who claim interest-bearing products are unregistered securities.
In February, BlockFi agreed to pay $100 million in a landmark settlement with the US SEC and state authorities over its yield product.
Those same state regulators issued a similar cease and desist order against Celsius in September, calling its yield product an unregistered security.
More broadly, DeFi poses risks for investors as it evolves to reflect traditional markets, a global securities regulator said in March, including a lack of product and system disclosure, uneven reliability and operational problems at scale.