LONDON/WASHINGTON, Sept. 21 (Reuters) – On May 11, Scott Odell, an analyst at British crypto lender Blockchain.com, reached out to Edward Zhao of Three Arrows Capital via instant message, asking the Singapore-based hedge fund to at least part to repay a $270 million loan.
Three Arrows had just been hit by the collapse of cryptocurrency Terra, raising doubts about its ability to repay. That was a concern for Blockchain.com as it had not taken any collateral to secure the loan, court filings show.
“This is time sensitive so let’s sort through if you’re available,” Odell said of the payback.
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Zhao seemed speechless.
“Yo,” he replied.
Three Arrows filed for bankruptcy in July, and Blockchain.com told Reuters it still got a penny back on its loan. The text exchange is among affidavits filed by liquidators as part of the hedge fund’s liquidation process. Continue reading
Three Arrows did not respond to requests for comment. Odell declined to comment, while Reuters could not reach Zhao.
The loan was part of an opaque web of unsecured loans between crypto companies that left the industry vulnerable when cryptocurrency prices plunged 50% earlier this year, according to a Reuters review of bankruptcy courts and regulatory filings and interviews with about 20 executives and experts.
Institutional crypto lending lends both cryptocurrencies and cash for a return. By forgoing the borrower from posting collateral — such as stocks, bonds, or more commonly other crypto tokens — lenders can charge higher interest rates and increase profits, while borrowers can generate cash quickly.
Blockchain.com has since largely halted its unsecured lending, which made up 10% of its revenue, Chief Business Officer Lane Kasselman told Reuters. “We’re not prepared to take the same risk,” he said, although he added that the company would continue to offer “extremely limited” unsecured loans to top clients under certain conditions.
Unsecured lending has become common across the crypto industry, according to the review of filings and interviews. Despite the recent market shakeout, many industry insiders said the practice is likely to persist and even grow.
Alex Birry, chief analytical officer for financial institutions at S&P Global Ratings, said the crypto industry is indeed seeing a trend toward unsecured lending across the board. The fact that crypto is a “concentrated ecosystem” increases the risk of contagion across the sector, he added.
“So if you only lend to people who are operating in that ecosystem, and especially if the number of those counterparties is relatively limited, yes, you’re going to see events like the one we just saw,” he said of the collapse in summer lenders.
CRYPTO BOOM AND FAIL
Crypto lenders, the de facto banks of the crypto world, boomed during the pandemic, attracting retail customers with double-digit interest rates in return for their cryptocurrency deposits. On the other hand, institutional investors like hedge funds looking to make leveraged bets paid higher rates to borrow the funds from lenders who profited from the difference. Continue reading
Crypto lenders are not required to hold capital or liquidity buffers like traditional lenders, and some found themselves vulnerable when a lack of collateral forced them – and their clients – to suffer large losses. Continue reading
Voyager Digital, which became one of the summer’s biggest casualties when it filed for bankruptcy in July, offers a glimpse of the rapid growth in unsecured crypto lending.
The New Jersey-based lender’s crypto loan book grew from $380 million in March 2021 to around $2 billion in March 2022, and only 11% of that $2 billion required collateral, according to regulatory filings of the company.
The lender collapsed after Three Arrows defaulted on a crypto loan that was then worth more than $650 million. Although neither party has said whether this loan was unsecured, Voyager has not reported any liquidation of collateral for the default, while Three Arrows has listed its collateral status with Voyager as “unknown,” according to the companies’ bankruptcy filings. Continue reading
Voyager declined comment on this article.
Rival lender Celsius Network, which also filed for bankruptcy in July, also offered unsecured loans, court filings show, although Reuters could not determine the extent.
Because most loans are personal loans, the level of unsecured lending is unknown across the industry, with estimates even by those involved in the business varying wildly.
For example, crypto research firm Arkham Intelligence put the figure at around $10 billion, while crypto lender TrueFi put the figure at at least $25 billion.
Antoni Trenchev, co-founder of crypto lender Nexo, said his company turned down requests from funds and merchants asking for unsecured loans. He estimated unsecured lending across the industry “probably in the hundreds of billions of dollars.”
BULLISH ON BORROWING
While Blockchain.com has largely retreated from unsecured lending, many crypto lenders remain hopeful about the practice.
Most of the 11 lenders polled by Reuters said they would continue to lend unsecured loans, although they didn’t say how much of their loan book that would be.
Joe Hickey, global head of commerce at BlockFi, a major crypto lender, said it will continue its practice of only offering unsecured loans to top clients for whom it has seen verified financials.
A third of BlockFi’s $1.8 billion in loans were unsecured as of June 30, according to the company, which was bailed out by crypto exchange FTX in July citing losses on a loan and increased customer withdrawals. Continue reading
“I think our risk management process was one of the things that saved us from major credit events,” Hickey said.
Additionally, a growing number of smaller peer-to-peer lending platforms are trying to fill the gap created by the exit of centralized players like Voyager and Celsius.
Sid Powell, co-founder and CEO of unsecured crypto lending platform Maple, said institutional crypto lenders were more cautious after Three Arrows’ bankruptcy, but conditions have since normalized and lenders are now more comfortable lending unsecured.
Executives at two other peer-to-peer lenders, TrueFi and Atlendis, said they’ve seen demand surge as market makers continue to seek unsecured loans.
Brent Xu, CEO of Umee, another peer-to-peer platform, said that the crypto industry would learn from its mistakes and that lenders would do better by lending to a wider range of crypto companies.
These include, for example, firms looking to make acquisitions or fund expansions, he added, rather than focusing on those making leveraged crypto price deals.
“I’m very optimistic about the future of unsecured borrowing and lending,” Xu said.
MILLIONS OF DOLLARS BITCOIN
Certainly, many crypto loans are collateralized. But even then, the collateral is often volatile tokens that can quickly lose value.
BlockFi overcollateralized a loan to Three Arrows but still lost $80 million, the lender’s CEO Zac Prince said in a tweet in July. BlockFi said its lending to the hedge fund was secured with a basket of crypto tokens and shares in a Bitcoin trust.
“A more traditional lender would likely want more than full collateral coverage for a crypto-backed loan, since the value of the collateral could fluctuate by 20% or more on any given day,” said Daniel Besikof, a partner at Loeb & Loeb who works there Bankruptcy.
“Lending $1 million in exchange for $1 million in bitcoin is riskier than lending against more traditional, stable collateral.”
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Reporting by Elizabeth Howcroft in London and Hannah Lang in Washington; Edited by Michelle Price and Pravin Char
Our standards: The Thomson Reuters Trust Principles.