Crypto-lenders in turmoil as markets rewind from “uncertain” risk management

In the midst of bankruptcy applications and sector-related layoffs, crypto borrowers have received a significant blow.

Voyager Digital was the last major cryptocurrency lender caught up in the downfall of Singapore-based hedge fund firm Three Arrows Capital (3AC) on Wednesday. The lender has filed for Chapter 11 bankruptcy in the Southern District of New York.

Less than a week before, 3AC filed Chapter 15 bankruptcy, four days after being ordered to be liquidated by a court in the British Virgin Islands. The location of 3AC co-founders Kyle Davies and Zhu Su is still unknown.

Questions about the legitimacy and in fact the need for increased regulation have begun to gain a foothold after the industry’s upheavals in recent weeks.

Many of the sector’s major lenders, including Celsius, Babel Finance and Vauld, have stopped withdrawals due to extreme market conditions and a liquidity crisis affecting other sectors in the industry, including exchange providers.

As a result of the ongoing turmoil, cryptocurrencies – mainly reflected in the bellwether asset bitcoin – have fallen from their records in November. Bitcoin was last seen swapping hands for around $ 20,400, up slightly on the day, but down more than 70% from November’s high of $ 69,000.

Bitcoin’s down from around $ 36,000 – seen at the time of Terra’s UST stablecoin collapse on May 7 – shows that confidence was already declining at that time. Bitcoin has since fallen another 30% from $ 30,000 seen on June 8 – days before Celsius stopped withdrawing – to its current level.

“The problems of major players such as Celsius and 3AC have triggered massive withdrawals of client funds from multiple cryptocurrencies offering lending, borrowing and trading services,” Milosz Papst, director of UK investment research firm Edison Group, told Blockworks in an email.

He said that many of the industry’s platforms have suffered even though only a few of the industry’s companies were found to have been exposed to 3AC and Celsius, which triggered a liquidity crisis as a result of risky games in Terra’s failed stablecoin project.

On Wednesday, the Digital Currency Group (DCG) -supported crypto brokerage firm Genesis confirmed that it had also been exposed to 3AC for an undisclosed loan amount with a weighted average margin requirement of over 80%.

DCG has made certain commitments to Genesis related to 3AC to ensure that Genesis has the capital available to operate and scale its business in the long term, said CEO Michael Moro in a chirping Wednesday.

Navigate risk

Some, like the institutional lending company Anchorage Digital, remain steadfast. The “use” of what they see as significant risk management and appropriate counterparty credit analysis, Anchorage said they continue to steer their ship safely along rocky shores by ensuring it knows exactly which borrower counterparties are on board.

“From our point of view, our risk management was properly aligned with the inherent risk in the market,” Nathan McCauley, co-founder and CEO of Anchorage, told Blockworks in an interview Wednesday. “When we have borrowers on board, we constantly assess their credit.”

He said his company regularly asks these borrowers to provide quarterly statements or other ongoing updates on their financial health.

Anchorage Digital was founded in 2017, and is a regulated crypto platform that provides institutions with integrated financial services and infrastructure. The platform also offers storage solutions to large customers.

The lender is home to the world’s first federally chartered digital asset bank and boasts such people as Paradigm’s legal manager, Katie Biber, and Andreessen Horowitz’s general partner, Chris Dixon, as board members.

3AC, meanwhile, is said to have borrowed from Voyager at an interest rate of 12% on an uncertainty basis before depositing in Terra’s lending and loan protocol, Anchor, with an interest rate of 19%. After the collapse of Terra, some, including 3AC, were taken down with their pants down when the price of LUNA – the original Terra token that tried to stop the stack coin UST from dismantling – fell sharply.

“In general, if you are going to do under- or unsecured lending … you need to have a very good counterparty credit analysis,” McCauley said when asked about the current situation for the cryptocurrency market. “It is possible to make it safe.”

“Your risk management systems must be extremely good. And even then, you are still exposed to surprising market events that may take place.”

Before filing for bankruptcy, Voyager 3AC issued a $ 650 million default notice on unsecured loans. Blockworks has repeatedly contacted 3AC, but has not yet received a response.

“There were a lot of things that happened in the markets that have proven to be unsafe,” McCauley said. “When we were looking at building our book, we wanted to build a lending book with realistic APYs that enabled our lenders to preserve capital and not lose capital because we got them into difficult or potentially unsecured loans.”

When asked, Anchorage declined to disclose how much it offered in annual percentage returns, although the company said it offers institutional customers up to 5.15% annual percentage returns on bitcoin deposits, up to 3.97% on ether and 9.58% at USDC.

Can lenders stay afloat?

In the midst of the liquidity crisis and bankruptcy filings, Anchorage said in a blog post last month, although it was not the first to the lending market and did not offer the largest lines of credit it was due to its “twice, cut once” approach, the firm has managed to keep head over the water.

Anchorage said they do not use capital in decentralized finance nor do they use their capital to finance investment strategies compared to other competitors in the market.

“Despite the fact that the market went through extreme volatility and it was found that many people did not perform risk management properly, we had a very large book and managed it flawlessly all the way,” McCauley said.

“We’m pretty sure we can go through similar cycles.”

The co-founder added, while further regulation may help protect retail investors from current market problems, it is already possible for lenders to choose to be regulated in their lending programs.

Celsius is not registered with the Securities and Exchange Commission or Anchorage, although the Anchorage Digital Bank National Association is chartered by the US Office of the Comptroller of the Currency.

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