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What is cryptocurrency lending and what happened to the percentage? – Tech Tribune France

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It appears that savers frustrated with the paltry returns offered by banks in recent years have found a solution: so-called crypto loan accounts that can pay interest rates of 18% or more. Millions have accumulated in these products offered by startups including Celsius Network, introducing a whole new group of crypto investors. It now appears that some of these amazing returns were too good to be true. After amassing more than $20 billion in assets at its peak, Celsius has seen its deposits plummet until it plunged into a solvency crisis, dealing another blow to the already fragile public confidence in the crypto world.

1. What is cryptocurrency lending?

At first glance, crypto loan accounts look a lot like savings accounts offered by banks, but with cryptocurrency instead of traditional cash. An investor opens an account, deposits cryptocurrency, and earns interest. There are many deposits in bitcoin, while other investors use stablecoins – tokens that often have a price tag of $1. Others use less popular and more volatile cryptocurrencies. Accounts generally pay interest in the same currencies as deposited. Some have prices that change daily. Others offer a fixed rate and the funds are locked in for a specific period.


2. What is the size of the cryptocurrency loan?

It’s still small compared to traditional banking, but it’s growing fast. Celsius said it had approximately $11.8 billion in deposits on May 17, while BlockFi Inc. In mid-June reported deposits of more than 10 billion dollars. Gemini Trust Co. began offering accounts in February 2021 and said last August that it had more than $3 billion in deposits.

3. How can they afford high returns?

The companies that offer the accounts say they are able to lend out customer deposits to institutional investors at higher rates. Sometimes these institutions need to borrow cryptocurrency to carry out their own transactions, such as betting on a drop in the price of cryptocurrency or taking advantage of price differences on other financial instruments. But regulators said they believe some crypto credit companies are using the funds for other business activities. Some may invest client money in high-risk crypto projects, make a profit from the bets and reap the difference. The bottom line is that there are no uniform rules for companies to disclose exactly what deposits they can and cannot use for. The same goes for decentralized finance, or DeFi, tools that also attract crypto investors with exorbitant interest payments.

4. How is cryptocurrency lending different from DeFi?

Celsius, BlockFi and other crypto lending companies deal directly with their customers and pay them interest. With DeFi, it could simply be a computer code, rather than a middleman, that handles borrowing, lending, and interest payments. Lending cryptocurrency to earn interest via DeFi is sometimes referred to as yield farming. This, in turn, differs from staking, where holders of cryptocurrency allow their tokens to be used to help order transactions on the blockchain, or digital ledger, that that coin uses.

5. What happened with degrees Celsius?

His recent troubles began after Celsius made a large investment in a staking token called stETH. StETH allows people – and companies like Celsius – to contribute to the Ethereum blockchain and earn additional returns through DeFi. The sharp drop in the value of crypto assets in May led to stETH trading at a discount and the token becoming more liquid. This made it difficult for Celsius to raise funds for refunds when users wanted to withdraw their funds. On June 12, Celsius announced it was halting withdrawals due to “extreme market conditions,” an apparent attempt to fend off the digital equivalent of banking.

6. What have regulators done with regards to cryptocurrency lending?

Regulators and investor advocates are concerned that consumers may realize they are risking much more than they would with a savings bank account. Since crypto accounts are not FDIC insured, customers can lose their deposits if the company goes bankrupt, gets hacked, or loses customer funds. Few of the companies providing the accounts sought approval from US federal regulators first, which has already caused a backlash. In July 2021, securities regulators in Alabama, Texas, New Jersey, Kentucky and Vermont filed lawsuits against BlockFi alleging that the company was offering unregistered securities. Several of the states themselves filed suits against Celsius. Coinbase Global Inc. to offer similar accounts, but abandoned that proposal after the Securities and Exchange Commission said it might sue the company. BlockFi announced in February that it would seek Securities and Exchange Commission (SEC) approval for accounts that pay customers high returns for lending their cryptocurrency in a record $100 million settlement with market watchdogs, federal and state Securities.

7. What could change as a result of the Celsius problems?

The crisis in degrees Celsius can accelerate regulatory crackdowns. Financial watchdogs seem to view cryptocurrency lenders as one of the least fruitful in their attempt to impose law and order on the broader crypto industry. After all, with companies like Celsius and BlockFi, there is a clear entity to pursue, which is not always the case with DeFi transactions.

8. What if cryptocurrency accounts are considered securities?

This classification opens companies to an entirely new system of registration and disclosure requirements to make products more secure. This will likely mean higher costs for crypto companies, and possibly an end to those massive returns for investors.

More stories like these are available at bloomberg.com

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