The dangers of crypto lending highlighted | PYMNTS.com

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Despite receiving a $500 million line of credit on June 21, faltering crypto broker Voyager Digital announced today that it is reducing its daily withdrawal limit from $25,000 to $10,000.

Voyager has been in trouble since revealing exposure to potentially insolvent crypto hedge fund Three Arrows Capital, which suffered huge losses when stablecoin terraUSD and its partner cryptocurrency Luna crashed in a 48 run. billion dollars in early May.

But the amount he had loaned Three Arrows, $720 million in bitcoins and stablecoins, shocked investors, who ripped off 60% of his stock value on June 22.

While support from FTX Exchange CEO Sam Bankman-Fried, Alameda Research, a trading company, appears to be keeping Voyager on its feet, with its stock stabilizing around $0.58 – down from $1.23 on June 21 – the reduction of the withdrawal limit could have been much worse.

See more: Is Crypto’s Richest Billionaire Becoming Its ‘Lender of Last Resort?’

Another firm hit by the reported insolvency of Three Arrows, lending firm Celsius, halted all withdrawals from its 1.7 million customers on June 12 and is reportedly struggling to find cash.

He is not alone. Crypto lender BlockFi was also hit by Three Arrows – and also received backing from Bankman-Fried, with a $250 million line of credit from FTX.

Lack of regulation

This is a sign of the growing problem the largely unregulated cryptocurrency industry has with lending.

Both BlockFi and Celsius are centralized versions of the bread-and-butter crypto lending and borrowing platforms of decentralized finance (DeFi), which in some ways act like banks. They solicit deposits from investors looking for interest – very, very high interest – on their money. They lend it to others who put up crypto collateral which is usually 150% of the borrowed amount.

While much of the regulatory and political attention has focused on the risk for small investors that could shift, or at least expand, to larger investors. In this case, the bankruptcy of a large borrower, Three Arrows, put the funds of a large number of small investors at risk.

Although these cases involved centralized companies, many lending and borrowing platforms are DeFi operations, which means that regulation will be much more difficult because there is, in theory, no person or organization to regulate. Although this is debatable – a number of international financial regulators believe they are not as decentralized as they claim – it will certainly be a heavier weight.

Another question is who will regulate these lenders.

The US Securities and Exchange Commission (SEC) has claimed some regulatory authority over the company, warning crypto exchange Coinbase not to start a lending/borrowing service and forcing BlockFi to pay it a $100 fine. million dollars and to a group of state securities regulators, as well as registration with the SEC. She and state agencies refer to these lending operations as unlicensed securities offerings — a designation that receives some pushback from the crypto industry.

Read more: BlockFi’s $100M settlement with SEC sparks internal discussion

But Congress is in the process of defining most cryptocurrencies as commodities regulated by the Commodity Futures Trading Commission (CFTC), which would certainly complicate jurisdictional issues.

See more: Senate Crypto Bill Debuts and Crypto Industry Takes Big Wins

Less than transparent

In February, Fitch Ratings predicted the BlockFi settlement would speed up the regulatory process, adding that it could accelerate the growth of the industry segment.

The crypto lending industry operated “much like commercial bank savings accounts that pay APRs on customer deposits, but at much higher rates,” Fitch said. These can reach 20% or even more.

He added that “locking up cash and the risks involved are very different. Crypto interest accounts are not FDIC insured and have an increased risk of loss due to cybercrime or hacking of crypto lenders.

More importantly, he noted that despite industry claims that loans are oversecured, this is not always the case.

“BlockFi’s crypto repositories, which [were] approximately $10 billion was lent to institutional counterparties, with only 17% of loans being over-collateralized despite claims that such loans were “generally” over-collateralized.

See also: New SEC Top Cop: No Free Pass for Unregistered Crypto Lenders

While much of the loans taken by Three Arrows would have been oversized, bitcoin’s roughly 60% price drop this year underscored that crypto collateral is still risky.

The whole industry is operating in a gray area, Perianne Boring, founder and CEO of the Digital Chamber of Commerce, told Reuters after Celsius halted withdrawals.

“We are now seeing the consequences of regulators’ failure to provide clarity,” she said. “I hope recent events will accelerate efforts to provide clearer policies for the industry and certainty for those investing in digital assets.”

But all of this begs a pretty simple question: if it looks like a bank, acts like a bank, and lends like a bank, wouldn’t it make sense to regulate it like a bank?

And since there is no shortage of banking regulators, why look for a new regulator for crypto?

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