LONDON/WASHINGTON (Reuters) – British crypto lender Blockchain.com analyst Scott Odell told Edward Zhao of Three Arrows Capital on May 11 that hedging in Singapore He sent an instant message asking the fund to repay at least part of its $270 million loan. .
Three Arrows has just been hit by the collapse of the cryptocurrency Terra, calling into question its ability to repay. Blockchain.com did not provide collateral to secure the loan, which was a concern, court filings show.
“This is time sensitive, so let’s see if it’s available,” O’Dell said of the reimbursement.
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Zhao seemed speechless.
“Yes,” he replied.
Three Arrows filed for bankruptcy in July, and Blockchain.com told Reuters it has yet to recover a cent of the loan. The text exchange is in an affidavit filed by the liquidator as part of the hedge fund liquidation proceedings. read more
Three Arrows did not respond to a request for comment. O’Dell declined to comment, but Reuters was unable to reach Zhao.
Reuters reviewed bankruptcy court and regulatory filings and interviewed about 20 business executives and experts, saying the loans helped the industry thrive when cryptocurrency prices crashed 50% earlier this year. It was part of an opaque network of unsecured loans between cryptocurrency companies that were at risk.
Institutional crypto lending involves lending cryptocurrencies and cash in exchange for yield. By eliminating the need for borrowers to provide collateral such as stocks, bonds, or more generally other crypto tokens, lenders can charge higher interest rates and make a profit, allowing borrowers to cash out quickly. can produce.
Blockchain.com has since nearly stopped unsecured loans, which accounted for 10% of its revenue, chief operating officer Lane Kasselman told Reuters. “We are not going to be involved in the same level of risk,” he said, adding that the company offers “very limited” unsecured loans to top clients under certain conditions. rice field.
Unsecured loans have become commonplace across the crypto industry, according to filing and interview reviews. Despite the recent shakeout, many industry insiders said the practice is likely to continue and even spread.
Alex Billy, chief analytics officer for financial institutions at S&P Global Ratings, said the crypto industry is indeed seeing a trend towards unsecured lending more broadly. The fact that cryptocurrencies are a “centralized ecosystem” has increased the risk of contagion across the sector, he added.
“So if we were only lending to people who were active in this ecosystem, and especially if the number of these counterparties was relatively limited, yes, we would see events like the one we just saw.” he said of the Summer Collapse. Lenders.
Crypto Boom and Recession
Crypto lenders, the de facto banks of the crypto industry, boomed during the pandemic, luring retail customers with double-digit rates in exchange for crypto deposits. Conversely, institutional investors such as hedge funds seeking to place leveraged bets paid higher interest rates to borrow money from lenders who profited from the difference. read more
Cryptocurrency lenders do not need to hold capital or liquidity buffers like traditional lenders and are at risk when a lack of collateral forces them and their customers to suffer large losses. Some people have noticed that read more
Voyager Digital, which filed for bankruptcy in July and became one of the summer’s biggest victims, offers a window into the rapid growth of unsecured crypto lending.
The New Jersey-based lender’s crypto loans increased from $380 million in March 2021 to almost $2 billion in March 2022, with only 11% of that $2 billion collateralized. The company’s regulatory filings show that it did not.
Lenders went bankrupt after Three Arrows defaulted on a crypto loan worth over $650 million at the time. Neither party has disclosed whether the loan was unsecured, but Voyager did not report liquidating any collateral over its default, and Three Arrows called its collateral status with Voyager “unknown.” Yes, the companies’ bankruptcy filings show. read more
Voyager declined to comment for this article.
Rival lender Celsius Network, which also filed for bankruptcy in July, also offered unsecured loans, court documents show, though Reuters could not confirm the size.
Since most loans are private, the amount of unsecured loans industry-wide is unknown, and even those in business give wildly different estimates.
For example, cryptocurrency research firm Arkham Intelligence puts the figure at around $10 billion, while cryptocurrency lender TrueFi says at least $25 billion.
Antoni Trenchev, co-founder of crypto lender Nexo, said his company turned down requests from funds and traders for unsecured loans. He estimated unsecured lending across the industry at “probably hundreds of billions of dollars.”
bullish on borrowing
Blockchain.com has largely withdrawn from unsecured lending, but many cryptocurrency lenders are confident in their practice.
Most of the 11 lenders interviewed by Reuters said they would continue to offer unsecured loans, but did not specify how much of their outstanding loans would be.
Joe Hickey, global head of trading at major cryptocurrency lender BlockFi, said the firm will continue its practice of only offering unsecured loans to top-tier customers who have verified audited financials.
A third of BlockFi’s $1.8 billion loan was unsecured as of June 30. The company said he was bailed out by crypto exchange FTX in July, citing an increase in loan losses and customer withdrawals. read more
“I think our risk management process is one of the things that has helped us avoid a bigger credit event,” Hickey said.
Additionally, a growing number of smaller peer-to-peer lending platforms are looking to fill the gap 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 became more cautious after the Three Arrows bankruptcy, but the situation has since normalized. , said lenders are getting used to unsecured loans again.
Executives at two other peer-to-peer lenders, TrueFi and Atlendis, say demand is growing as market makers continue to seek unsecured loans.
Brent Xu, CEO of another peer-to-peer platform, Umee, said the crypto industry will learn from its mistakes and lenders will do better by extending lending to more diverse crypto companies.
For example, rather than focusing on companies trading leveraged on cryptocurrency prices, it would include companies seeking acquisition or expansion funding, he added.
“I am very bullish on the future of unsecured borrowing and lending,” said Xu.
1 million dollar bitcoin
Indeed, many crypto loans are secured. However, even then, collateral is frequently in the form of volatile tokens that can quickly lose value.
BlockFi overcollateralized its loan to Three Arrows and still lost $80 million, the lender’s CEO, Zac Prince, said in a tweet in July. BlockFi said its loans to hedge funds are secured by a basket of crypto tokens and shares in a Bitcoin trust.
“More traditional lenders are likely wanting more than full collateral coverage for crypto-backed loans.
“Lending $1 million against $1 million of Bitcoin is riskier than lending against more traditional and stable collateral.”
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Reported by Elizabeth Howcroft of London and Hannah Lang of Washington. Edited by Michelle Price and Pravin Char
Our criteria: Thomson Reuters Trust Principles.