Five years ago, the nascent crypto lending market looked promising. Crypto lenders like Salt Lending, Celsius Network, BlockFi, Voyager Digital, Nexo and Unchained Capital were meeting a demand among digital-asset investors who wanted a tax-free return on their money. They had already weathered a crypto downturn and were confident their future looked bright.
In the past year, Celsius, Voyager and BlockFi have filed for Chapter 11 bankruptcy and have been sued by former customers and partners. New York Attorney General Letitia James filed a lawsuit against Celsius CEO Alex Mashinsky for allegedly defrauding hundreds of thousands of investors out of billions of dollars worth of cryptocurrency. The Securities and Exchange Commission has sued BlockFi, Genesis Global Capital and Gemini Trust Co. over their crypto lending programs, claiming they violate investor protection laws.
But in spite of these setbacks, some observers believe there is life left in the concept of crypto lending and that the industry will go on.
“My sense is that there’s still a future for the product,” said Joseph Silvia, a member of the law firm Dickinson Wright in Chicago. “I think we’ll find that the more conservative lenders are going to be the ones that make it through this interim period where you do have bankruptcies, failures and volatility.”
“I don’t think the industry is dead,” he said.
“Is the crypto lending industry doomed? I don’t think so,” said Robert Le, a crypto analyst at Pitchbook. “What I think will happen is that there needs to be rules and regulations in order for these lenders to come back, because most of them were fully unregulated products.”
Crypto lenders are going to have to have to wait until there are some rules and regulations in place before they can really start marketing the products, he said.
“I don’t think financial regulators are going to sit around and let them continue doing this for much longer,” Le said. “There is much more scrutiny on these providers right now.”
For instance, the way Celsius advertised to everyday consumers made it seem the firm was providing a regulated banking product, he noted.
“They even mentioned the FDIC on their web page because the cash in the account was held at an FDIC-insured bank, but that’s just cash,” Le said. “The crypto is not treated as cash. I think there was a lot of misinformation and poor marketing just because it’s in such an unregulated environment.”
Celsius, Salt Lending, Gemini, BlockFi, Nexo and Voyager Digital did not respond to a request for comment.
Some forms of crypto lending have more of a likelihood of survival than others.
One flavor of crypto lending: Using digital assets as collateral
There are different kinds of crypto lending.
In one version, people who have bought bitcoin or another cryptocurrency and want to hold onto it (sometimes called “hodlers,” a term crypto enthusiasts latched onto after a bitcoin forum member mistakenly — some say drunkenly — wrote “I AM HODLING” in a 2013 exchange, but some say HODL now stands for “hold on for dear life”) and yet want to use their money in some way, to make a luxury purchase or an investment, for instance. The borrowers use their crypto as collateral for a loan of fiat currency that they pay back with interest. The loans are typically smaller than the amount of cryptocurrency put up as collateral, and if the price of the cryptocurrency decreases, the lenders make margin calls to protect the loan.
Crypto companies that offer this include Coinbase, Unchained Capital, Salt Lending, Nexo and Binance. This kind of crypto lending is like any other kind of secured lending and it’s likely to survive. (Of these companies, only Unchained Capital responded to a request for an interview.)
“One of the main reasons people take out these loans is that they don’t want to sell” their cryptocurrency, “because that becomes a taxable event,” Le said. “By taking out a loan, they don’t have to pay any taxes, while they get to take advantage of some of their holdings. There’s definitely still a demand for that.”
Le pointed to decentralized crypto lenders like Maker, Aave and Compound that are still growing.
Crypto loans are performing well at Unchained Capital, according to CEO Joe Kelly. The company has made conservative decisions, he said, such as its choice to support only bitcoin and no other cryptocurrencies as collateral and to lend at a 50% loan-to-value ratio that in early 2021 it dropped to 40%.
Unchained Capital’s approach of lowering loan-to-value ratios for its loans makes sense, Silvia said.
“They’re being more conservative about it,” he said.
Clients of Unchained Capital are long-term bitcoin holders who have been through cycles before, Kelly said. It does not rehypothecate, “so any collateral that comes in stays put,” he said. “It’s only ever moved in a liquidation scenario or sometimes the price runs up and clients can redeem some portion of the collateral.”
Unchained has about 4,000 customers, Kelly said; around 80% are mass affluent and high-net-worth individuals, and the rest are family offices and businesses. Unchained Capital lets customers hold the private keys to their bitcoin and works with a partner, Kingdom Trust, that acts as key agent for the loans.
“For our client vaults where they hold their own keys, we can’t move their assets. They have control.” Kelly said. “When it comes to a loan, the client has to move their BTC to a segregated address where we and Kingdom Trust work together to hold their keys.”
“Once that bitcoin’s in that vault, Unchained can’t control it,” Kelly said. “We can’t move it around. The clients hold the keys.” A typical loan is around $100,000. Interest rates on the loans are currently 14% to 15%, though historically they have run from 10% to 13%.
Customers use these loans to invest in other companies or to buy real estate or cars, Kelly said.
As the value of bitcoin dropped last year, Unchained Capital made several margin calls.
“But all of it was done with success, so we were pretty fortunate to get through all that,” Kelly said. The company’s cost of capital has gone up. “That’s probably true across the board for everybody.”
Unchained Capital does not lend bitcoin out.
“I think that is where a lot of folks could get in trouble,” Kelly said. “It’s really tough to have good risk management practices on actually lending out the assets, not to mention the custody risks.”
Another form of crypto loan: Lending out deposited cryptocurrency
In a second version of crypto lending, consumers deposit cryptocurrency with a company that lends it out to others, often hedge funds, in return for regular interest payments. BlockFi, Celsius Network and Genesis Global Capital are among the companies that do this. The companies sometimes call these deposits high-interest savings accounts, which has been a red flag for regulators because a “savings account” has a specific regulatory definition. BlockFi, Celsius and Genesis did not respond to a request for an interview.
In 2021, several state regulators told BlockFi to stop offering this product. The state agencies said they were concerned about the emergence of BlockFi and other startups like it that seek to reinvent traditional financial products without working within the law or established regulatory frameworks. They noted that the BlockFi account is not a bank savings account backed by the FDIC, nor is it an investment covered by the Securities Investor Protection Corp. It’s actually an unregistered security that leaves investors exposed to risk, according to these officials. BlockFi did not respond to a request for an interview, but in a statement at the time said the BlockFi Interest Account is not a security and should not be regulated as one.
There is demand for this kind of crypto lending, too, Le said.
“If you are a Celsius or a BlockFi, you are playing on both sides of the market,” he said. “You are accepting crypto from users who depositing it, and then you’re lending it out to those who are looking for loans. In a sense, that’s net interest, so you want to play both sides. It’s a good business model.”
The market crash is partly to blame for these crypto lenders’ troubles, Le noted.
“If you deposited one bitcoin into Celsius and you borrowed $50,000 and the price of bitcoin dropped down to $35,000, you’re not going to pay back the $50,000 loan,” he said. “You’d rather just keep it, and then Celsius can liquidate your bitcoin at $35,000. Essentially that was happening across the entire platform and that’s why Celsius, BlockFi and Voyager faced that insolvency.” Some of these companies have been hacked, too, he added.
The SEC has come after BlockFi, Gemini Trust and Genesis Global Capital, saying they are offering securities without registration. (Gemini also did not meet a request for an interview in time for this story.)
“Through this unregistered offering, Genesis and Gemini raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors,” the SEC wrote in its complaint against the two companies in mid-January.
Genesis and Gemini had an agreement under which Gemini offered its customers an opportunity to loan their crypto assets to Genesis in exchange for interest. Beginning in February 2021, Genesis and Gemini began offering the Gemini Earn program to retail investors.
In November 2022, Genesis announced that it would not allow Gemini Earn investors to withdraw their crypto assets, because Genesis lacked sufficient liquid assets to meet withdrawal requests following volatility in the crypto asset market. At the time, Genesis held about $900 million in investor assets from 340,000 Gemini Earn investors. Gemini terminated the Gemini Earn program earlier this month.
“Crypto lending platforms and other intermediaries need to comply with our time-tested securities laws,” SEC Chair Gary Gensler said in a statement. “Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law.”
Two years ago, Coinbase was planning to offer a crypto lending product called Lend that would have let customers earn interest on select assets, starting with 4% interest on USD Coin. In September 2021, the SEC sent the company a Wells notice, warning it not to launch the product. Coinbase did not respond to a request for an interview in time for this article.
Despite all the recent upsets, it’s unlikely regulators will shut down the crypto lending market entirely, Silvia said.
“I think this area of the market is going to be creative enough to work with regulators and legislators, and find different scenarios where they can provide value and gain market share,” he said.