Crypto lender SALT makes a comeback with $64.4 million in funding

The crypto winter and FTX collapse have decimated the ranks of cryptocurrency borrowers. Genesis, BlockFi, Voyageur Digital and Celsius Network have all filed for bankruptcy in the past seven months, and the contagion may still not be over. But at least one crypto lender appears to be on the comeback trail.

SALT Lending, one of the world’s first cryptocurrency lenders, announced on February 8 that it has closed a $64.4 million financing that will strengthen its balance sheet and replenish its capital reserves. Accredited investors will receive shares of the company’s preferred stock in return for their funding. Although the Series A recapitalization effort is still subject to regulatory approval, it should allow the company to return to full operations in the first quarter.

As reported, Denver-based SALT Lending announced a “pause,” i.e., a freeze on withdrawals and deposits to the lending platform in mid-November, shortly after the FTX crash. Like some other crypto firms, SALT had used the Bahamas-based FTX as a source of liquidity for its lending operations.

“Crypto faced a perfect winter storm in 2022, bringing with it significant industry players such as 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 stand stronger than ever,” Shawn Owen, founder and interim CEO of SALT, said in an announcement today.

While SALT Lending never filed for bankruptcy, withdrawals stopped in November set aside a ministorm on social media. The firm also lost its lending license in California, and a deal to sell the company to BnkToTheFuture was scrapped.

The California license remains suspended, although Owen told Cointelegraph in an interview that it is working with state regulators to have it reinstated. “We remain as transparent as we can, and we educate them on all the details of exactly how the business model works.” But Owen still can’t say at this point if and when the license will be restored. “You can’t guarantee anything because they have discretion. But we do everything we can to be good actors.”

A series B financing round in 2023

SALT plans to seek additional funding later in 2023 — an expected Series B funding in the $100 million range — to further build out its capital buffer, Owen told Cointelegraph.

FTX’s collapse clearly affected SALT’s operations. “We had accounts at FTX,” Owen said. He was stunned when the Bahamas-based stock exchange suddenly collapsed. “We felt up to 48 hours before [it crashed] that FTX was another platform that had good liquidity and a good interface and was one of ours.”

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Individuals and businesses can secure fiat loans using Bitcoin (BTC) and other cryptocurrencies as collateral on SALT’s platform, but sometimes borrowers want to pay off the loans and get their collateral back.

Therefore, a lender like SALT needs to be able to prove that it “can sell collateral pretty much immediately at a certain price,” he further explained. “And to do that, you have to have relationships with buyers—or you have to be the buyer.” Hence the need for additional capital.

The freezing of withdrawals and deposits in November “was frightening for our customers. As you can imagine, some of them had already been locked in and lost money in both Celsius and Blockfi. So they thought, ‘This is just another one. Everything is going down.'”

It took a Herculean effort to calm things down, he suggested. “I literally worked days, nights, weekends for over 60 days, talking directly to people.” He had a mission “to talk to each one of our customers personally.”

When asked about the firm’s clients, Owen said they were primarily individuals and businesses holding and saving Bitcoin for the long term, as BTC is the dominant value on SALT’s platform. Customers want to monetize their crypto “whether it’s to buy property, pay bills or not,” but they need to have confidence that they can pay off the loan and get their collateral back if they want to.

Founded in 2016, SALT claims to be the first platform to launch blockchain-backed collateralized loans, although it remains a relatively small player compared to three other firms to which it is often compared, BlockFi, Celsius and Nexo.

But when FTX imploded, “it shocked us beyond what we were prepared for,” and so “we ducked our heads and just said, ‘We don’t know how bad this contagion is. We better find out exactly where this is going.'”

That’s when the firm decided to “basically put our service on hold” to protect capital, Owen said. – It was something we had never done before. The business was never intended to be an off switch or to be turned on and off.”

Do you need more regulation?

Of course, many other people were also surprised and shocked, and calls were heard almost immediately for the crypto industry to be better regulated. Is regulation something that crypto borrowers will just have to live with for years to come?

“In our opinion, the regulation is already here.” In the United States, lenders are required to be licensed on a state-by-state basis. The problem was not the absence of laws or regulations. “It was simply that they did not follow the rules,” Retail customers were encouraged to deposit money on platforms that were neither banks nor registered investment firms, and in return were able to earn large “returns.” “It was clearly illegal and we never did it. I don’t think it will ever be allowed now that the public is well informed,” Owen said.

Others believe that all the crypto lending bankruptcies have created a market vacuum, and traditional financial institutions like banks will now rush in to fill the void. Owen’s view?

“I think the banks will get involved when they can, but I don’t think we’re anywhere near that right now.” Recent events have discouraged their participation. – We see a lot of withdrawal. In fact, many banks today have more appetite for central banks’ digital currencies than they do for crypto, he believes.

“If you had asked me a year ago, I would have said the banks were probably getting a lot more interested. If you ask me today, I’d say they’re probably at least three or four years out.”

Pay attention to counterparty risk

Are there any lessons learned from the past year? “The main thing is fraud. You always have to watch out for counterparty risk because there are bad actors.” But there are some concrete steps that can be taken right now.

“First and foremost, there is the principle of having collateral to back any type of loan.” So many of the meltdowns in the past year were the result of unsecured lending. “Lending can be much safer if you lend against an asset that is over-leveraged.”

Another lesson is openness. “I think a lot of people feel very taken advantage of because they were told one thing and it turned out to be something else.” And a third lesson is the need for capital reserves. There is no FDIC insurance for crypto, so it is especially important to have adequate capital reserves, “that is why we want to raise for a large Series B funding round of $100 million plus, because to expand our model we will to require significant capital reserves, much more like a bank.”

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The crypto sector isn’t out of the woods yet, but SALT Lending’s interim CEO believes a healthier industry will eventually emerge.

“One thing about Bitcoin and crypto is that it is ‘anti-fragile’, to use a technical term.” It is used to being attacked, and each time it appears more robust than before. “I think right now there’s no doubt we’ll come back a lot stronger.”

Owen doesn’t know if the storm is over yet, “although it feels like we’re through the worst of it. But I don’t want to confuse us.”