1. What is a crypto loan?
At first glance, cryptocurrency lending accounts are very similar to bank-provided savings accounts, but instead of traditional money, they use cryptocurrencies. Investors open accounts, deposit cryptocurrencies and earn interest. Many deposits are in Bitcoin, but other investors are using Stablecoin-token prices are often fixed at $ 1. Others are using lesser-known, more volatile cryptocurrencies. Accounts usually pay interest in the same currency as the deposit. Some rates change daily. Others offer fixed interest rates and the money is locked for a period of time.
2. How much is the cryptocurrency loan?
It’s still small compared to traditional banks, but it’s growing rapidly. Celsius said he had $ 11.8 billion worth of deposits on May 17, but in mid-June BlockFi Inc. declared more than $ 10 billion in deposits. Gemini Trust Co. began offering accounts in February 2021 and said it had more than $ 3 billion in deposits last August.
3. How can they make a lot of money?
The company that offers the account says it can lend its clients’ deposits to other institutional investors at even higher rates. These institutions may borrow crypto to carry out their own transactions, such as betting that the price of crypto will go down or taking advantage of the price difference of other financial instruments. It’s hard to know what a crypto lender is investing in because there is no unified rule to disclose exactly what a deposit can and cannot be used for. The same applies to decentralized finance (DeFi) tools, which seduce crypto investors with very high interest payments.
4. How is crypto loan different from DeFi?
Celsius, BlockFi, and other crypto lenders deal directly with their clients and pay interest to them. With DeFi, it’s just your computer code that manages borrowing, lending, and interest payments, not an intermediary. Lending crypto to earn interest through DeFi is sometimes referred to as yield farming. This is different from staking, where cryptocurrency holders use tokens to help order transactions on the blockchain or digital ledger used for that coin.
5. Why did some crypto lenders run into problems?
It is dangerous to lend money to someone else’s investment. Because if their bet becomes sour and they can’t repay you, you’re left with nothing. Celsius, Babel, and Bold all blamed the crypto market for liquidity issues. Celsius has invested heavily in a token called stETH, invested in the Ethereum blockchain, and was able to earn additional revenue through DeFi. The sharp decline in the value of crypto assets in May left stETH transactions at a discounted price, making tokens more illiquid. As a result, it was difficult for Celsius to raise funds for redemption when the user wanted to withdraw. In June, we stopped withdrawals as a clear effort to avoid the digital version of the run.
6. What did the regulatory agency do about crypto lending?
Regulators and investor supporters are worried that consumers do not understand that they carry far more risk than bank savings accounts. Cryptographic accounts are not insured by FDIC, so if the company goes bankrupt, is hacked, or otherwise loses the customer’s funds, the customer may lose their deposit. Few of the companies offering accounts first sought approval from US federal regulators, which had already led to a backlash. In July 2021, securities regulators in Alabama, Texas, New Jersey, Kentucky, and Vermont filed a proceeding against BlockFi alleging that the company offered unregistered securities. .. Several of the same states have filed proceedings against Celsius. Coinbase Global Inc. had planned to offer a similar account, but withdrew the proposal after the Securities and Exchange Commission stated that it could sue the company. BlockFi announced in February that it would seek SEC approval for an account that pays customers high yields to lend cryptocurrencies as part of a record $ 100 million settlement with the federal and state securities Watchdog.
7. What could change now?
Crisis such as Celsius can accelerate regulatory crackdowns. The financial watchdog seems to see crypto lenders as part of the lowest achievements in attempts to bring law and order to the broader crypto industry. After all, companies like Celsius and BlockFi have a clear entity to sue, but this is not always the case with DeFi transactions.
8. What if my crypto account is considered a security?
This designation gives companies access to an entirely new system of registration and disclosure requirements to make their products more secure. That would probably mean higher costs for crypto companies and probably the end of those huge returns for investors.
More stories like this are available at Bloomberg.com