- The crypto lending market has been rocked by poor risk management and recent bankruptcy filings
- Anchorage Digital said it has steered its ship by opting early for a regulated regime and offering credit lines below the market average
Amid bankruptcy filings and industry-related layoffs, crypto lenders have been dealt a major blow.
Voyager Digital on Wednesday became the latest major crypto lender to be caught in the demise of Singapore-based hedge fund firm Three Arrows Capital (3AC). The lender has filed for Chapter 11 bankruptcy in the Southern District of New York.
Less than a week earlier, 3AC filed for Chapter 15 bankruptcy, four days after a British Virgin Islands court ordered the liquidation. The whereabouts of 3AC co-founders Kyle Davies and Zhu Su remain unknown.
Questions of legitimacy and the need for increased regulation have begun to gain traction following the industry’s upheaval in recent weeks.
Many of the sector’s larger lenders, including Celsius, Babel Finance and Vauld, have suspended payouts due to extreme market conditions and a liquidity crisis affecting other sectors of the industry, including exchange providers.
As a result of the ongoing turmoil, crypto prices — most notably reflected in Bitcoin as a benchmark — have fallen from their all-time highs in November. Bitcoin last changed hands for around $20,400, up slightly on the day but more than 70% below its November high of $69,000.
Bitcoin’s drop from around $36,000 – seen at the time of Terra’s UST stablecoin collapse on May 7 – shows that confidence was already fading at that point. Bitcoin has since fallen another 30% from $30,000 hit to current levels on June 8 – days before Celsius stopped withdrawals.
“The troubles of big players like Celsius and 3AC have led to massive withdrawals of customer funds from multiple crypto platforms offering lending, lending and trading services,” Milosz Papst, director of UK-based investment research firm Edison Group, said in a statement Email to Blockworks.
He said many of the industry’s platforms have suffered, although few of the industry’s firms have been exposed to 3AC and Celsius.
On Wednesday, Digital Currency Group (DCG)-backed crypto brokerage firm Genesis confirmed that it too had exposure to 3AC for an undisclosed loan amount with a weighted average margin requirement of over 80%.
DCG has assumed certain of Genesis’ liabilities related to 3AC to ensure Genesis has the capital to operate and scale its business over the long term, CEO Michael Moro said in a tweet Wednesday.
Some, like institutional lending firm Anchorage Digital, are standing firm. “Empowered” by what it sees as significant risk management and proper counterparty credit analysis, Anchorage said it has continued to navigate its ship safely along rocky shores by ensuring it knows exactly which borrower counterparties it has on board.
“In our view, our risk management was properly aligned with the inherent risk of the market,” Nathan McCauley, co-founder and CEO of Anchorage, said in an interview with Blockworks on Wednesday. “As soon as we have borrowers on board, we continuously check their creditworthiness.”
He said his company regularly asks these borrowers to provide quarterly statements or other ongoing updates about their financial health.
Founded in 2017, Anchorage Digital is a regulated crypto platform that provides institutions with integrated financial services and infrastructure. The platform also offers depot solutions for large customers.
The lender is home to the world’s first government-approved digital asset bank and features board members including Katie Biber, Paradigm’s Chief Legal Officer, and Chris Dixon, General Partner of Andreessen Horowitz.
3AC, meanwhile, reportedly borrowed from Voyager at a 12% interest rate on an unsecured basis before being deposited in Terra’s Anchor lending and lending protocol at a 19% interest rate. Following the collapse of Terra, some including 3AC were caught with their pants down as the price of LUNA – the native Terra token that was trying to protect its stablecoin UST from depegging – fell sharply.
“In general, if you’re going to under- or unsecured lending…you need to have a very good credit history of the counterparty,” McCauley said when asked about the current state of things in the crypto lending market. “It’s safe to do that.”
“Your risk management systems must be extremely good. And even then, you’re still caught up in any surprise market events that might take place.”
Before Voyager filed for bankruptcy, 3AC issued a $650 million unsecured debt ordinance. Blockworks has contacted 3AC repeatedly but has not yet received a response.
“A lot of things have happened in the markets that have proven uncertain,” McCauley said. “When we looked at building our book, we wanted to build a loan book with realistic APYs that would allow our lender clients to preserve capital and not lose their capital because we place them in troubled or potentially uncertain loans.”
When asked, Anchorage declined to publicly disclose how much it has offered in annual percentage returns, though the company said it offers institutional clients up to 5.15% annual percentage returns on bitcoin loans, up to 3.97% % on Ether and 9.58% on USDC.
Can lenders stay afloat?
Amid the liquidity crunch and bankruptcy filings, Anchorage said in a blog post last month that while it wasn’t the first to enter the credit market and wasn’t offering the largest lines of credit, it did because of its “measure twice, cut once.” ” approach that has kept the company afloat.
Anchorage said it does not allocate capital to decentralized finance, nor does it use its capital to fund “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 were not managing risk appropriately, we had a very large book and managed it consistently flawlessly,” McCauley said.
“We’re pretty confident that we can go through similarly situated cycles.”
The co-founder added that while additional regulation could help protect retail investors from the current market woes, it is already possible for lenders to choose to regulate their lending programs.
Celsius is not registered with the Securities and Exchange Commission, and neither is Anchorage, although the Anchorage Digital Bank National Association is chartered by the US Office of the Comptroller of the Currency.
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