Digital Assets
With the Demise of So Many Lending Platforms, Who Will Fill the Void?

Is crypto lending dead after crypto-winter, and the failure of several prominent centralized cryptocurrency lenders? Not really. But the sector needs to make some constructive changes if it wants to gain the trust of the public back.
Fortunately, there are several different platforms that are alive and kicking and will be able to take the sector forward. Ledn is one of the survivors which continues to thrive. Last year, the crypto lender appointed Deloitte as its external auditor. The firm said the audit from Deloitte will co-exist alongside its bi-annual Proof-of-Reserves Attestation, performed by Armanino LLP.
However, the Canadian digital asset lending platform shut down certain services within Canada in Dec. 2022 due to ongoing discussions with regulators. As of February 1, 2023, it no longer offers BTC Savings Account, USDC Savings Account, BTC and USDC Trading, and B2X Loans to Canadian clients.
Another crypto lender that is still here is Nexo Capital. However, Bulgarian authorities have received allegations that Nexo customers are using the platform for illegal activities, including laundering money, financing terrorist activities, and tax offenses, which the crypto lender denies.
Launched in 2018, the UK-based Nexo recently winded down its U.S. operations after receiving cease-and-desist orders from several U.S. states. In addition to this, the Securities and Exchange Commission (SEC) charged the firm with selling unregistered securities, saying the company failed to register with the SEC before offering its crypto lending product, “Earn Interest.”
As part of its settlement with the SEC, Nexo has agreed to stop offering the interest program, pay a $22.5 million penalty, and pay an additional $22.5 million to settle with state regulators.
The sector is also seeing new entrants like Arch, a fintech company targeting alternative asset investors. The firm launched its first crypto lending product this year after closing a $2.75 million funding round in the second half of last year. The startup is currently legal to operate in 31 states and will use the funds to continue adding regulatory approvals.
Founded in February 2022, the New York-based Arch's platform allows users to take out a single loan collateralized across combined alternative assets, starting with crypto but plans to eventually expand to public stocks, equity investments in pre-IPO companies, and real estate. For the custody of its loans, which are denominated in either USD or USDC, Arch is using BitGo.
Making a Comeback
Another crypto lender is Salt, which is trying to make a comeback. On February 9, Salt Lending, one of the world's first cryptocurrency lenders, announced that it had closed a $64.4 million financing round that will strengthen its balance sheet, replenish its capital reserves, and help build its growth strategy.
The funding is being raised from accredited investors who, in exchange, will receive shares of the company's preferred stock. While the Series A recapitalization effort is still subject to approval by regulatory authorities, SALT is expecting to return to full operations during the first quarter of 2023.
Founded in 2016, the Denver-based crypto lender wasn't unscathed by the Bahamas-based FTX collapse that decimated the ranks of cryptocurrency lenders. In fact, in mid-November, it announced a “pause” on withdrawals and deposits on its platform. And much like some other crypto firms, Salt was using FTX as a source of liquidity for its lending operations.
“Crypto faced a perfect winter storm in 2022, taking with it significant industry participants like Terraform Labs, Voyager Digital, Celsius Network, Three Arrows Capital, FTX, and BlockFi. Salt was not immune to these market forces, but we are determined to emerge stronger than ever,” said Shawn Owen, founder and interim CEO of Salt.
At the time, the firm lost its California lending license, and a deal to sell the company to Bnk To The Future was abandoned. While the license remains suspended, Sat is working with the state's regulators to get it restored.
“We're staying as transparent as we can, and we're educating them on all the details of exactly how the business model works.” But, of course, Salt “can't guarantee anything because they do have discretion. But we're doing everything we can to be good actors,” he said.
This is not all, though. Salt plans to seek further funding later in 2023. This anticipated Series B financing will be in the $100 million size range to build the lender's capital buffer, Owen told a media publication.
Need for Concrete Steps
While we have some crypto lenders that are still serving the market, the sector certainly needs better execution.
As we saw over the past year, some serious problems with crypto lenders led Genesis Global Capital, FTX's biggest unsecured lender, to file for bankruptcy in January 2023. Other companies that had exposure to FTX include Gemini, Coinshares, and Galaxy Digital.
Genesis' bankruptcy this year followed the demise of Celsius Network and Voyager Digital in July 2022 and BlockFi, which filed for Chapter 11 bankruptcy protection in late November 2022. BlockFi had over $1.2 billion in loans and assets tied up with FTX and its sister company Alameda Research. These collapses reveal complex inter-firm linkages among crypto firms.
This goes on to show that the contagions from the meltdown of the now-defunct crypto exchange FTX and others will still continue to reverberate this year. And the market and the sector will certainly take time to recover from the crisis.
The thing is, unlike many traditional creditors, like banks, cryptocurrency lenders aren't required to have capital or liquidity buffers to help them weather hard times. Meanwhile, their collateral, which is in cryptocurrencies, typically suffers from high volatility; thus, when markets plunge, it hits crypto lenders brutally.
Additionally, crypto lenders have been offering high APY savings products to attract customer deposits only to loan out customer deposits to other firms without their express approval. And when the debtors like FTX fail, customers are unable to withdraw their funds.
Many crypto lending companies also lend to customers who offer much less collateral, which further decreases in value significantly when crypto prices crash, as in the case of TerraUSD/Luna. The under-collateralization of such loans only makes things worse during heightened market volatility, which is inherent to crypto.
Fraud is another big reason for the recent debacle in the market. With so many bad actors in the space, it is integral to watch out for counterparty risk. To make the crypto lending space safer, some concrete steps need to be taken, such as secured lending and having collateral to back any kind of loan. It can be made much safer if lending is overcollateralized.
There's also the need for capital reserves. While there's no FDIC Insurance for crypto, firms in the sector need to have sufficient capital reserves.
What's Ahead?
While the crypto lending sector is struggling, NFT lending has had its strongest month, with $444 million recorded in monthly volume in January 2023. A report from NFTGators noted that 17,900 ETH was distributed through 4,399 loans, with the average loan value being 4 ETH per loan, 29 ETH per borrower, and 61.5 ETH per lender. This increased activity has reduced the cost of NFT loans, as lenders pay an average of $90 per loan in interest payments.
Lending in the sector is not going anywhere. But with all that has been happening in the crypto market in the past year, many have called for the crypto industry to be better regulated.
According to Salt Lending's Owen, “the regulation is already here.” The problem wasn't an absence of laws or rules regulating lenders but rather that they were not following rules.” Retail customers were encouraged to deposit funds on platforms — that weren't banks or registered securities firms — in return for outsized yields, which was illegal, he said.
The crypto lending industry is clearly facing a few challenges, but this doesn't mean that decentralized finance (DeFi) is going to go extinct. Developers are currently working on making crypto lending more risk-averse and efficient.
Although the trust has been hurt, it hasn't been wiped out completely, and it will recover as new processes are put in place, and new players enter the market, which can even be from traditional finance (TradFi).
While some believe all that has occurred in the last year has spooked and discouraged participation from them, many expect traditional financial institutions like banks to rush in to fill the void left by the crypto lending bankruptcies.
While traditional firms have expertise in risk management, decentralized protocols built on top of Ethereum and other blockchains can offer permissionlessness, transparency, censorship resistance, and ownership of funds. Ultimately, the winners will be consumers who will receive better, cheaper, and more reliable services.
By the end of the year, we can also see a new wave of crypto lenders emerging to replace the now-depleted ranks of crypto lenders. However, it remains to be seen if we are out of the woods yet. While the crypto market seems to be through the worst of it, it still can't be said if the storm is over yet.