LONDON/WASHINGTON – Scott Odell, an analyst from in the UK, instantly messaged Edward Zhao, of Three Arrows Capital, asking for repayment of at least a portion of a $270 Million loan to the Singapore hedge fund.
Three Arrows was just hit by the collapse of cryptocurrency Terre, which raised doubts about its ability repay. This was a concern for Blockchain.com, as it hadn’t taken collateral to secure its loan, court filings reveal.
Odell stated that the repayment was urgent and suggested that they be arranged if possible.
Zhao seemed lost for words.
He replied, “Yo!”
“uhh”
“hmm”
Three Arrows filed for bankruptcy on July 31, and Blockchain.com informed Reuters that it has not been able to repay a cent of its loan. The hedge fund liquidators filed affidavit documents in the liquidation proceedings.
Three Arrows declined to comment on requests. Zhao was not able to reach Reuters, and Odell declined to comment.
According to a Reuters review, which included interviews with around 20 executives and experts, the loan was part of an opaque web that included unsecured lending between crypto-company companies. This left the industry exposed after cryptocurrency prices plummeted 50% earlier this year.
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Institutional crypto lending is where cryptocurrencies are loaned in exchange for cash. Lenders can waive the requirement that borrowers provide collateral, such as stocks, bonds, or other crypto tokens, in order to charge higher rates and increase profits. Borrowers can also generate quick cash.
According to Lane Kasselman, Blockchain.com’s chief business officer, unsecured lending had been 10% of the company’s revenue. He stated that “we’re not willing in the same level risk,” but added that the company would still offer “extremely restricted” unsecured loans for top clients, subject to certain conditions.
According to interviews and filings, unsecured lending is now common in the crypto industry. Many industry insiders believe that the practice will continue despite the recent shakeout.
Alex Birry, chief analyst for financial institutions at S&P Global, stated that the crypto industry was actually broadly seeing a shift towards unsecured lending. He said that the fact that crypto is a “concentrated environment” increases the risk of contagion in the sector.
He said that if lenders are limited to those who are part of this ecosystem and especially if there are fewer of these counterparties, then you’ll see events like the one we just witnessed.
CRYPTO BOOM and BUST
The de facto bank of crypto, crypto lenders, flourished during the pandemic. They offered double-digit returns on their deposits and attracted retail customers. Hedge funds, which were looking to place leveraged bets, paid higher rates to borrow funds from lenders.
The capital and liquidity buffers required for crypto lenders are not the same as traditional lenders. Some were forced to take large losses due to a lack of collateral.
Voyager Digital was one of the most significant casualties of the summer, filing for bankruptcy in July. This is a glimpse into the rapid growth and unsecured crypto lending.
According to regulatory filings, the crypto loan book of the New Jersey-based lender grew from $380m in March 2021, to approximately $2 billion in March 2022. It took collateral for only 11% of that $2 Billion.
After Three Arrows failed to pay a crypto loan amounting more than $650m, the lender was forced to collapse. Voyager didn’t report liquidating collateral due to the default. Three Arrows, however, reported that it was not unsecured. Voyager bankruptcy filings showed that Three Arrows had listed their collateral status as “unknown”.
Voyager declined comment on this article.
Celsius Network, a rival lender, also filed for bankruptcy in August. Court filings indicate that they offered unsecured loans, but Reuters couldn’t determine the scale.
Private loans make up the majority of the industry’s unsecured lending. However, even business people can give wildly different estimates.
Arkham Intelligence, a crypto research firm, put the figure somewhere in the range of $10 billion while TrueFi, a crypto lender, said it was at least $25 billion.
Antoni Trenchev is the co-founder and CEO of cryptocurrency lender Nexo. He stated that his company turned down requests from traders and funds for unsecured loans. He said that uncollateralized lending in the industry was “probably in excess of the hundreds of billions”
BULLISH ON BRORROWING
Although Blockchain.com has made a significant reduction in unsecured lending, many cryptocurrency lenders are still confident in the practice.
Asian Trade interviewed 11 lenders and they all said that they would continue to provide uncollateralized loans. However, they didn’t specify how large their loan portfolio would be.
BlockFi’s global head of trading Joe Hickey said that it will continue to offer unsecured loans to only top clients who have had their financials audited.
According to BlockFi, a third of its $1.8 billion loans were unsecure as of June 30, 2018. The company was rescued by crypto exchange FTX, who cited losses on a loan, and increased customer withdrawals, in July.
Hickey stated that “I believe our risk-management process saved us from having larger credit events.”
Related: Halal-approved crypto products are getting a lot of attention on the DeFi platform.
A growing number of peer-to-peer lending platforms, including Voyager and Celsius, are also looking to fill the void left by the exits of central players like Celsius.
Sid Powell, CEO and co-founder of Maple, an unsecured crypto lending platform, stated that institutional crypto lenders were more cautious following Three Arrows’ bankruptcy, but that conditions have since improved and lenders are comfortable lending unsecured again.
TrueFi and Atlendis executives said that they have seen an increase of demand from market makers as they continue to look for unsecured loans.
Brent Xu is the CEO of Umee. Umee is another peer-to-peer platform. He said that the crypto industry will learn from its mistakes and that lenders will do better by extending loans for a wider range of crypto companies.
He said that this would include firms looking to acquire or fund expansion and not just those who leverage trades on crypto price.
Xu stated, “I am very bullish about the future of unsecured lending and borrowing.”
MILLION DOLLARS OF BITCOIN
Many crypto loans can be secured, that is a fact. However, even then, many crypto loans are secured with volatile tokens, which can lose their value quickly.
BlockFi over-collateralized the loan to Three Arrows, but lost $80 million, according to Zac Prince, the CEO of the lender. He tweeted in July. BlockFi claimed that its lending to the hedge-fund was secured using a combination of shares and crypto tokens.
Daniel Besikof is a Loeb & Loeb partner who works in bankruptcy. He stated that a more traditional lender would want more than just full collateral coverage for a crypto-backed loan.
“Lending a million bucks against a million bitcoins is more risky than borrowing against traditional, stable collateral.”
