LONDON/WASHINGTON (Reuters) – On May 11, Scott Odell, an analyst at British crypto bank Blockchain.com, sent an instant message to Edward Chow of Three Arrows Capital asking a Singapore hedge fund to repay at least part of a $270 million loan.
Three Arrows has been hit by the collapse of cryptocurrency Terra, which has raised doubts about its ability to repay. This was a concern for Blockchain.com because it did not take collateral to secure the loan, court filings show.
“This is time sensitive, so let’s sort if you’re available,” Odell said of reimbursement.
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Zhao seemed lost for words.
He replied, “Yo.”
Three Arrows filed for bankruptcy in July, and Blockchain.com told Reuters it has yet to recover a cent of its loan. The text exchange is among the affidavit documents submitted by the liquidators as part of the hedge fund liquidation procedure. Read more
Three Arrows did not respond to requests for comment. Odell declined to comment, while Reuters was unable to reach Zhao.
The loan was part of a shadowy web of unsecured lending among crypto firms that left the industry exposed when cryptocurrency prices collapsed by 50% earlier this year, according to a Reuters review of bankruptcy court and regulatory filings, and interviews with about 20 executives and experts.
Institutional cryptocurrency lending includes cryptocurrency lending as well as cash for a return. By waiving the requirement for the borrower to provide collateral – such as stocks, bonds or other more popular tokens – lenders can charge higher rates and increase profits, while borrowers can make money quickly.
Chief Business Officer Lynn Castleman told Reuters that Blockchain.com has since largely stopped unsecured lending, which used to account for 10% of its revenue. “We are not prepared to take on the same level of risk,” he said, though he added that the company would still provide “very limited” unsecured loans to large clients under certain circumstances.
Unsecured lending has become popular in the cryptocurrency industry, according to a review of filings and interviews. Despite the recent change, many industry insiders said the practice is likely to continue and could grow.
Indeed, the cryptocurrency industry is in fact seeing a large-scale trend toward unsecured lending, said Alex Perry, chief financial institutions analyst at S&P Global Ratings. He added that the fact that the cryptocurrency was a “concentrated ecosystem” increased the risk of contagion across the sector.
He said about the lenders’ summer meltdown.
Mutation and slot CRYPTO
Crypto lenders, the de facto banks of the crypto world, have thrived during the pandemic, attracting retail customers with double-digit rates for their crypto deposits. On the flip side, institutional investors, such as hedge funds eyeing leveraged bets, paid higher rates for borrowing money from lenders, who took advantage of the difference. Read more
Cryptocurrency lenders are not required to hold capital or cash in reserve like traditional lenders and some have found themselves vulnerable when a lack of collateral has forced them – and their clients – to take big losses. Read more
Voyager Digital, which became one of the biggest casualties of the summer when it filed for bankruptcy in July, provides a window into the rapid growth of unsecured crypto lending.
The New Jersey-based lender’s crypto-loan book grew from $380 million in March 2021 to nearly $2 billion in March 2022, taking collateral for just 11% of that $2 billion, the company’s regulatory filings show.
The lender collapsed after Three Arrows defaulted on a crypto loan worth more than $650 million at the time. Although neither party said whether this loan was unsecured, Voyager did not report liquidating any collateral due to default, while Three Arrows listed its collateral status with Voyager as “unknown,” as Corporate bankruptcy filings appear. Read more
Voyager declined to comment for this article.
Court files showed rival lender Celsius Network, which also filed for bankruptcy in July, offered unsecured loans as well, although Reuters was unable to confirm the scale.
Since most loans are private, the amount of unsecured lending across the industry is unknown, and even business participants provide very different estimates.
Cryptocurrency research firm Arkham Intelligence put the figure in the range of $10 billion, for example, while crypto lender TrueFi said it was at least $25 billion.
Anthony Trenchev, co-founder of crypto lender Nexo, said his company has rejected applications from funds and merchants seeking unsecured loans. He estimated that unsecured lending across the industry was “probably in the hundreds of billions of dollars”.
thriving in borrowing
While Blockchain.com has largely retreated from unsecured lending, many cryptocurrency lenders remain confident in the practice.
Most of the eleven lenders interviewed by Reuters said they would still provide loans without collateral, although they did not specify the size of their loan book.
Joe Hickey, global head of trading at BlockFi, a major cryptocurrency lender, said that it will continue its practice of offering only unsecured loans to major clients who have seen audited financial statements for them.
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, when it reported loan losses and an increase in customer withdrawals. Read more
“I think our risk management process was one of the things that saved us from any bigger credit events,” Hickey said.
Moreover, a growing number of peer-to-peer microlending platforms are seeking to fill the gap left by the exit of central players such as Voyager and Celsius.
Sid Powell, co-founder and CEO of unsecured crypto lending platform Maple, said institutional crypto lenders were more cautious after the Three Arrows bankruptcy, but conditions have since normalized and lenders are now comfortable again with unsecured lending.
Executives at two other peer-to-peer lenders, TrueFi and Atlendis, said they have seen increased demand as market makers continue to seek unsecured loans.
Brent Xu, CEO of Umee, another peer-to-peer platform, said the crypto industry will learn from its mistakes, and lenders will be better off offering loans to a more diverse group of crypto companies.
For example, this would include companies looking to acquire or fund expansion, he said, rather than focusing on those doing leveraged deals on cryptocurrency prices.
“I am very optimistic about the future of unsecured borrowing and lending,” Xu said.
Million Dollars in Bitcoin
Certainly, many cryptocurrency loans are secured. However, collateral is often in the form of variable tokens that can lose their value quickly.
The chief executive of the lender, Zach Prince, said in a tweet in July that BlockFi had added an additional loan to Three Arrows, but lost $80 million nonetheless. BlockFi said its lending to the hedge fund is secured by a basket of cryptocurrencies and shares in a bitcoin fund.
said Daniel Pesikoff, partner at Loeb & Loeb who is in bankruptcy.
“Lending a million dollars for a million dollars in bitcoin is riskier than lending against more stable traditional collateral.”
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(Reporting by Elizabeth Hocroft in London and Hannah Lange in Washington.) Editing by Michael Price and Praveen Shar
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