What crisis? High-stakes crypto lending looks set to be here to stay

LONDON/WASHINGTON, Sept 21 (Reuters) – Scott Odell, an analyst at British crypto lender Blockchain.com, sent an instant message to Three Arrows Capital’s Edward Zhao on May 11 asking the Singaporean hedge fund to repay at least part of a $270 million loan .

Three Arrows just took a hit from the crash of the cryptocurrency Terra, which raised doubts about its ability to pay off. That was a concern for Blockchain.com because no collateral was taken to secure the loan, court documents show.

“It’s time sensitive, so let’s decide if you’re available,” Odell said of the payout.

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Zhao looked speechless.

“Yo,” he replied.



Three Arrows filed for bankruptcy in July, and Blockchain.com told Reuters it has yet to recoup a cent of its loan. The text exchange is among the affidavit documents filed by the liquidators as part of the hedge fund’s liquidation proceedings. Read more

Three Arrows did not respond to requests for comment. Odell declined to comment, and Reuters was unable to reach Zhao.

The loan was part of an opaque web of unsecured loans between crypto companies that left the industry exposed when cryptocurrency prices crashed 50% earlier this year, according to a Reuters review of bankruptcy and regulatory filings and interviews with about 20 executives and experts.

Institutional crypto lending involves lending cryptocurrencies as well as cash in exchange for profit. By waiving the requirement that the borrower provide collateral — such as stocks, bonds, or more commonly other crypto tokens — lenders can charge higher rates and increase profits while borrowers can quickly generate cash.

Blockchain.com has since largely phased out its unsecured lending, which accounted for 10 percent of its revenue, Chief Business Officer Lane Casselman told Reuters. “We are not willing to commit to the same level of risk,” he said, although he added that the company would still offer “extremely limited” unsecured loans to top customers under certain conditions.

Unsecured lending has become commonplace in the crypto industry, according to the document review and interviews. Despite the recent shake-up, many industry insiders said the practice is likely to continue and may even grow.

Alex Beery, chief analyst for financial institutions at S&P Global Ratings, said that the crypto industry as a whole is actually seeing a trend towards unsecured lending. The fact that crypto was a “concentrated ecosystem” raised the risk of contagion in the sector, he added.

“So if you’re only lending to people working in that ecosystem, and especially if the number of those counterparties is relatively limited, yes, you’re going to see events like what we just saw,” he said of the summer meltdown of lenders.


Crypto lenders, the de facto banks of the crypto world, have thrived during the pandemic, wooing retail customers with double-digit interest rates in exchange for their cryptocurrency deposits. On the other hand, institutional investors like hedge funds that want to make leveraged bets pay higher rates to borrow the funds than lenders, who profit from the difference. Read more

Crypto lenders are not required to hold capital or liquidity buffers like traditional lenders, and some have found themselves at risk when a lack of collateral has forced them — and their customers — to take big losses. Read more

Voyager Digital, which became one of the biggest casualties of the summer when it filed for bankruptcy in July, provides a window into the rapid growth of unsecured crypto lending.

The New Jersey-based lender’s crypto loan portfolio grew from $380 million in March 2021 to about $2 billion in March 2022, and it took collateral for just 11 percent of that $2 billion, the company’s regulatory filings show.

The lender collapsed after Three Arrows defaulted on a crypto loan worth more than $650 million at the time. While neither party has said whether that loan was unsecured, Voyager has not reported liquidating any collateral over the default, while Three Arrows listed its collateral status with Voyager as “unknown,” bankruptcy filings show of the companies. Read more

Voyager declined to comment for this article.

Rival lender Celsius Network, which also filed for bankruptcy in July, also offers unsecured loans, court filings show, although Reuters could not determine the scale.

Because most loans are private, the amount of unsecured loans in the industry is unknown, with even those in the business giving wildly different estimates.

Crypto research firm Arkham Intelligence put the figure in the region of $10 billion, for example, while crypto lender TrueFi said at least $25 billion.

Antoni Trenchev, co-founder of crypto lender Nexo, said his company has rejected requests from funds and traders seeking unsecured loans. He estimated that unsecured lending in the industry amounted to tens of billions of dollars.


While Blockchain.com has largely retreated from unsecured lending, many crypto lenders remain confident in the practice.

Most of the 11 lenders interviewed by Reuters said they would still provide unsecured loans, although they did not specify what proportion of their loan book that would be.

Joe Hickey, global head of trading at BlockFi, a major crypto lender, said he would continue his practice of offering unsecured loans only to top clients for whom he has seen audited financial statements.

A third of BlockFi’s $1.8 billion in loans were unsecured as of June 30, according to the company, which was bailed out by crypto exchange FTX in July when it cited loan losses and increased customer withdrawals. Read more

“I think our risk management process was one of the things that saved us from bigger credit events,” Hickey said.

Additionally, a growing number of smaller peer-to-peer lending platforms are looking to fill the void left by the departure of centralized players like Voyager and Celsius.

Sid Powell, co-founder and CEO of unsecured crypto lending platform Maple, said institutional crypto lenders were more cautious after the Three Arrows default, but conditions have since normalized and lenders are now comfortable lending unsecured loans again .

Executives at two other lenders, TrueFi and Atlendis, said they have seen an increase in demand as market makers continue to seek unsecured loans.

Brent Xu, CEO of Umee, another peer-to-peer platform, said the crypto industry will learn from its mistakes and that lenders will do better by lending to a more diversified set of crypto companies.

For example, this would include firms looking to make acquisitions or finance expansion, he added, rather than focusing on those that leverage crypto prices.

“I am very bullish on the future of unsecured loans and credit,” Sue said.


Of course, many crypto loans are secured. Even then, however, the collateral is often in the form of volatile tokens that can quickly lose value.

BlockFi overcollateralized a loan to Three Arrows, but still lost $80 million on it, the lender’s CEO Zach Prince said in a tweet in July. BlockFi said the hedge fund’s lending is backed by a basket of crypto tokens and shares in a bitcoin trust.

“A more traditional lender would probably want more than full collateral coverage on a crypto-backed loan, because on any given day the value of the collateral can change by 20% or more,” said Daniel Besikoff, partner at Loeb & Loeb , which operates in bankruptcy.

“Lending a million dollars against a million dollars of Bitcoin is riskier than lending against more traditional, stable collateral.”

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Reporting by Elizabeth Howcroft in London and Hannah Lang in Washington; Editing by Michelle Price and Pravin Char

Our standards: The Thomson Reuters Trust Principles.

Elizabeth Howcroft

Thomson Reuters

Reports on the intersection of finance and technology, including cryptocurrencies, NFTs, virtual worlds and the ‘Web3’ money movement.

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