Crypto Lending Firms Struggling to Survive

From Celsius to Finblox and Three Arrow Capital, many companies are failing to weather the shock of the last two crypto crashes.

The last two crypto crashes in May and June have weakened several players in the same sector. They wanted to play in the realm of banks by lending and reimbursing deposits, but lacking sufficient guarantees, several cryptocurrency platforms are in turmoil and risk bankruptcy.

Interest rates over 18% for savers but 0.1% for borrowers, that’s what Celsius Network offered before all withdrawals had to be suspended on June 12 due to lack of sufficient liquidity.

Three weeks later, the funds, which reached $11.8 billion in mid-May, are still locked up.

“I think Celsius will go bankrupt,” predicts Omid Malekan, a professor at Columbia University. “Most of the trust (of customers) is gone”.

Since then, other names have joined Celsius, from CoinFlex to Babel Finance, which had also dived into credit and had to freeze withdrawals, while Voyager Digital had to limit them.

On these platforms, after depositing cryptocurrencies, a user can receive interest or borrow digital currencies, with their deposit serving as collateral.

$350,000 on Celsius

“It’s a shame we’ve come to this,” complains one user contacted via Reddit who claims to have left Celsius more than $350,000. “Celsius should have foreseen this kind of scenario”.

The streak started with the sharp drop in cryptocurrencies and bitcoin halved its value in less than two months.

This set off a chain reaction, forcing borrowers to provide new financial guarantees or immediately repay the borrowed money.

Some, such as Singaporean investment firm Three Arrows Capital, which is now in liquidation, were unable to cope and thus robbed the platforms of liquidity, forcing them to freeze the funds.

“Most of these companies have issued loans with no collateral or with insufficient collateral,” said Antoni Trenchev, co-founder of Nexo, another crypto platform he says got away with stricter lending policies and “prudent risk management.”

As many as five US states have opened or extended investigations into Celsius.

Some, including Alabama, had already ordered the platform to stop lending to customers residing in their state since last year.

“Great need for regulation”

“I expect very harsh repression,” said Omid Malekan. Despite the turbulence, most observers do not believe in a prolonged destabilization of the sector, or even in the extinction of credit in this market. “This is not the worst crisis cryptocurrencies have seen,” said Charles Jansen of Standard and Poor’s. “In a market in correction, you discover which projects had real value” and “the dreams that lived on easy money,” describes Omid Malekan.

“We expect massive consolidation in the crypto sector,” announces Antoni Trenchev, with creditworthy players getting their hands on those in trouble.

The episode took consciousness to the limits of an unsupervised universe. “There is a great need for regulation,” emphasizes Charles Jansen. “It’s a point that everyone in the industry agrees on.”

In the absence of an ad hoc regulatory framework, it has so far been the US market police officer, the SEC, who took matters into their own hands, but from an essentially repressive angle.

Several dozen bills have been introduced in the US Congress in recent months, but one of them has the wind in its sails. It is the first text to be endorsed by members of both parties, presented by Republican Senator Cynthia Lummis and Democrat Kirsten Gillibrand.

It has been well-received by the community, particularly as it proposes to treat cryptocurrencies as commodities, not financial securities, as the SEC would like. Some critics found it too conciliatory. “He is giving the crypto industry what it wants,” Hilary Allen, a law professor at the US University, wrote on Twitter.

In particular, he proposes entrusting oversight to another regulator, the CFTC, “which has no mandate to protect investors and has far fewer resources than the SEC,” the academic stressed.

“A more reliable risk assessment”

The European Union took the lead on Thursday, reaching an agreement on cryptocurrency regulation, which will notably strengthen investor guarantees and oversight.

The Standard & Poor’s agency sees in recent events a window to position itself as a benchmark, as in the world of traditional finance. For Charles Jansen, “the general feeling is that if there had been a more reliable risk assessment, perhaps fewer people would have been affected.”

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