What about cryptocurrency lenders? Bear markets have hit every corner of the cryptocurrency industry, but perhaps none more so than the cryptocurrency lending business. You already know the names: BlockFi, Celsius Network, and Genesis Global Trading.
There are others, but this once highly regarded company is one of the biggest issues of the year. They all have one thing in common: lending to digital assets. Is there something wrong? And will centralized cryptocurrency lenders be able to regain market share and trust?
Cryptocurrency lending is the process of bringing together people who have an excess of cryptocurrency and those who want to get their money back who want to borrow cryptocurrency and deposit those funds on a platform that lends those funds to people who are willing to provide collateral and pay. interested in obtaining financing
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In other words? “Crypto-currency lending is basically banking – into the cryptocurrency world,” he told Reuters earlier this year. And as Lisa of The Simpsons once said, most comparisons are problematic.
Before the market crash, lending was big business for the cryptocurrency industry. Celsius, sometimes called "neobank", has raised over $11 trillion on its platform. BlockFi, which recently filed for Chapter 11 bankruptcy protection, was valued at $3 trillion last year alone. Genesis, the Wall Street-focused company from parent CoinDesk Digital Currency Group, had $2.8 billion in loans at the end of the third quarter of this year (up from $11.1 billion in the same quarter last year).
Also Read: Crypto Lender BlockFi Bankrupt Sues Bankman-Fried
Cryptocurrency lenders have become so big, in part, because they offer high returns to depositors. While bank account interest can be as low as 1%, some cryptocurrency lenders have offered returns as high as 20%. Even in chaotic bull market times, people want to know where the profits are coming from.
Like banks, cryptocurrency lenders must earn money on deposits by lending them money. Loans typically pay a fee of between 5% and 10%, and cryptocurrency lenders like Celsius are expected to profit from the difference between the interest paid to savers and the fees received by borrowers.
As we learned this year, even when cryptocurrency lenders do well, they can quickly switch sides. Market volatility puts pressure on the normal activities of cryptocurrency lenders, including reducing the number of savers and borrowers. Faced with ever-increasing withdrawals, many of them have become illiquid or insolvent.
But we also know that lenders engage in illegal activity, lend (or re-mortgage) funds they shouldn't have, or generally make wrong bets. The Vermont Securities Regulator said in a statement that Celsius sometimes resembles a Ponzi scheme in that it relies on getting new investors to pay old investors. It does this by offering a rewards program tied to its CEL score and using its marketing budget to pay above-par returns. (This latter practice is also implemented in the "profitable" FTX program and the Anchor Protocol, a decentralized loan built on Earth, another big failure in 2022.)
Of course, not all cryptocurrency lenders are created equal, and not all of these companies fail for the same reasons. In addition, there is no reason to suspect that other cryptocurrency lenders are misusing customer funds. Since they are mostly private companies, it's not entirely clear what went wrong.
There is a growing call to regulate cryptocurrencies, which could be good for the industry. With Federal Deposit Insurance Corporation (FDIC) insurance (which insures up to $250,000 in bank deposits) unlikely to be accepted for crypto lenders, regulatory scrutiny could increase as these companies better manage deposits to remain able to pay. .
It should also be noted that cryptocurrency lenders grouped under the Decentralized Finance (DeFi) sub-economy fared better. These platforms usually require users to guarantee their loans and do not allow people to keep deposits because they are not secure. While crypto lenders can make good deals with people who are supposed to be trusted, they all play by the same rules in DeFi.
See also: DeFi Giant MakerDAO Chooses to Ride DAI Stablecoin Rewards