Explainer: The world of crypto lending

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A representation of cryptocurrencies in this illustration taken January 24, 2022. REUTERS/Dado Ruvic/Illustration

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LONDON, June 13 (Reuters) – Leading U.S. cryptocurrency lending firm Celsius Network froze withdrawals and transfers on Monday, citing “extreme” market conditions, triggering a selloff in crypto markets. Read more

Here’s what you need to know about crypto lending – a corner of the digital asset market that has exploded over the past two years as interest in cryptocurrencies skyrocketed.

WHAT IS THE PROBLEM?

Crypto lending is basically banking – for the crypto world.

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Just as customers of traditional banks earn interest on their savings in dollars or pounds, crypto users who deposit their bitcoin or ether with crypto lenders also earn money, usually in cryptocurrency.

While savings in traditional banks offer paltry returns due to historically low interest rates, crypto lenders offer much higher returns – up to 20%, although rates depend on the tokens deposited.

Crypto lenders make money by lending – also for a fee, usually between 5% and 10% – digital tokens to crypto investors or companies, who could use the tokens for speculation, cover or as working capital. Lenders profit from the difference between the interest they pay on deposits and the interest they charge on loans.

HIGH YIELDS? SO CRYPTO LENDERS MUST BE POPULAR

They are.

Crypto lending has exploded over the past two years, along with decentralized finance, or “DeFi” platforms. DeFi and crypto lending both tout a vision of financial services where lenders and borrowers bypass traditional financial firms that act as custodians of loans or other products.

The sites say they are also easier to access than banks, with potential customers facing less paperwork when lending or borrowing crypto.

The total value of crypto on DeFi sites hit a record $110 billion in November, five times higher than a year earlier and reflecting record highs for bitcoin, according to industry site DeFi Pulse.

Traditional investors and venture capitalists, from Canada’s second-largest pension fund, Caisse de Dépôt et Placement du Québec, to Bain Capital Ventures, have backed crypto lending platforms.

IS THERE A HITCH?

There are many.

Unlike traditional regulated banks, crypto lenders 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 customers who hold their crypto on the platforms could lose access to their funds – as happened with Celsius on Monday.

Crypto lenders also face other risks, from volatility in crypto markets that can affect the value of savings to technology failures and hacks.

WHO ARE THE GREATEST PLAYERS?

New Jersey-based Celsius is one of them, with more than $11 billion in assets in its platform.

Other major lenders are also based in the United States. New York-based Genesis provided $44.3 billion in loans in the first quarter, with $14.6 billion in active loans in March.

Other big names include US lender BlockFi, which manages some $10 billion in assets, and London-based Nexo, which has $12 billion.

REGULATORS SHOULD BE WORRIED, THEN?

Crypto lenders are in the crosshairs of US securities watchdogs and state regulators, who say 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. Read more

Those same state regulators issued a similar cease-and-desist order to Celsius in September, calling its Earn product an unregistered security.

More broadly, DeFi poses risks to investors as it evolves to mirror traditional markets, a global securities regulator said in March, including a lack of product and system disclosure, patchy reliability and large-scale operational problems. Read more

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Reporting by Tom Wilson and Elizabeth Howcroft in London and Hannah Lang in Washington; edited by David Evans

Our standards: The Thomson Reuters Trust Principles.

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