Major U.S. cryptocurrency lending company Celsius Network froze withdrawals and transfers on Monday, citing “extreme” market conditions, sparking a sell-off across crypto markets.
Here’s what you need to know about crypto lending – a corner of the digital asset market that has boomed over the last two years during soaring interest in cryptocurrencies.
What’s the deal?
Crypto lending is essentially banking – for the crypto world.
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Just as customers at traditional banks earn interest on their savings in dollars or pounds, crypto users that deposit their bitcoin or ether at crypto lenders also earn money, usually in cryptocurrency.
While savings at traditional banks offer paltry returns due to historically low interest rates, crypto lenders offer much higher returns – at the very top end as much as 20%, though rates depend on the tokens being deposited.
Crypto lenders make money by lending – also for a fee, typically between 5%-10% – digital tokens to investors or crypto companies, who might use the tokens for speculation, hedging or as working capital. The lenders profit from the spread between the interest they pay on deposits and that charged on loans.
High returns? So crypto lenders must be popular
Crypto lending has boomed over the past two years, along as decentralised finance, or “DeFi,” platforms. DeFi and crypto lending both tout a vision of financial services where lenders and borrowers bypass the traditional financial firms that act as gatekeepers for loans or other products.
The sites say they are easier to access than banks, too, with prospective clients facing less paperwork when lending or borrowing crypto.
The total value of crypto at DeFi sites soared to a record $110 billion in November, up fivefold from a year earlier and reflecting record highs for bitcoin, according to industry site DeFi Pulse.
Traditional investors and venture capital firms, from Canada’s second-biggest pension fund Caisse de Depot et Placement du Quebec to Bain Capital Ventures, have backed crypto lending platforms.
Is there a catch?
There are several.
Unlike traditional regulated banks, crypto lenders aren’t overseen by financial regulators – so there are few rules on the capital they must hold, or transparency over their reserves.
That means that customers who hold their crypto at the platforms could lose access to their funds – as happened with Celsius on Monday.
Crypto lenders also face other risks, from volatility in crypto markets than can hit the value of savings to tech failures and hacks.
Who are the biggest players?
New Jersey-based Celsius is among them, with over $11 billion assets in its platform.
Other major lenders are also based in the United States. New York-based Genesis originated loans of $44.3 billion in the first quarter, with $14.6 billion in active loans as of March.
Other big names include U.S. lender BlockFi, which has some $10 billion of assets under management, and London-based Nexo, which has $12 billion.
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Regulators must be worried, then?
Crypto lenders are in the sights of U.S. securities watchdogs and state regulators, who say that interest-bearing products are unregistered securities.
In February, BlockFi agreed to pay $100 million in a landmark settlement with the U.S. SEC and state authorities over its yield product.
Those same state regulators issued a similar cease and desist order to Celsius in September, calling its Earn product an unregistered security.
More widely, DeFi is throwing up risks for investors as it evolves to mirror traditional markets, a global body for securities regulators said in March, including a lack of disclosure of products and systems, patchy reliability and problems operating at scale.