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The crypto winter and FTX collapse have decimated the ranks of cryptocurrency lenders. Genesis, BlockFi, Voyager Digital and Celsius Network 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.<\/p>\n
Salt Lending, one of the world\u2019s first cryptocurrency lenders, announced on Feb. 8 that it had closed a $64.4 million financing round that will strengthen its balance sheet and replenish its capital reserves. Accredited investors will receive shares of the company\u2019s preferred stock in return for their funding. Though the Series A recapitalization effort is still subject to approval by regulatory authorities, it should allow the company to return to full operation in the first quarter.<\/p>\n
As reported<\/a>, the Denver-based Salt Lending announced a \u201cpause\u201d \u2014 i.e., a freeze \u2014 on withdrawals and deposits to its 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.\u00a0<\/p>\n \u201cCrypto faced a perfect winter storm in 2022, taking with it significant industry participants like 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 emerge stronger than ever,\u201d Shawn Owen, founder and interim CEO of Salt, said in an announcement on Feb. 8. <\/p>\n While Salt Lending never filed for bankruptcy, its November freeze on withdrawals set off a mini tempest on social media. The firm also lost its California lending license, and a deal to sell the company to Bnk To The Future was jettisoned<\/a>.\u00a0<\/p>\n The California license remains suspended, though Owen told Cointelegraph in an\u00a0interview that Salt is working with the state\u2019s regulators to get it restored. \u201cWe\u2019re staying as transparent as we can, and we\u2019re educating them on all the details of exactly how the business model works.\u201d But Owen still can\u2019t say at this point if and when the license will be restored. \u201cYou can\u2019t guarantee anything because they do have discretion. But we\u2019re doing everything we can to be good actors.\u201d<\/p>\n interview that Salt is working with the state\u2019s regulators to get it restored. \u201cWe\u2019re staying as transparent as we can, and we’re educating them on all the details of exactly how the business model works.\u201d But Owen still can\u2019t say at this point if and when the license will be restored. \u201cYou can’t guarantee anything because they do have discretion. But we’re doing everything we can to be good actors.\u201d<\/p>\n Salt plans to seek further funding later in 2023 \u2014 an anticipated Series B financing in the $100 million size range \u2014 to further build out its capital buffer, Owen told Cointelegraph. <\/p>\n FTX\u2019s collapse clearly impacted Salt\u2019s business. \u201cWe had accounts on FTX,\u201d said Owen. He was stunned when the Bahamas-based exchange suddenly collapsed. \u201cWe felt up until 48 hours before [it crashed] that FTX was another platform that had good liquidity and a good interface and was one of ours.\u201d<\/p>\n Recent:\u00a0As Bitcoin nears $25K, questions about rally\u2019s sustainability remain<\/a><\/em><\/strong><\/p>\n Individuals and businesses can secure fiat loans using Bitcoin (BTC<\/a>) and other cryptocurrencies as collateral on SALT\u2019s platform, but sometimes borrowers want to pay off their loans and recover their collateral. <\/p>\n Thus, a lender like Salt has to be able to prove that it \u201ccan sell collateral pretty much instantaneously at a certain price,\u201d Owen further explained. \u201cAnd in order to do that, you have to have relationships with buyers \u2014 or you have to be the buyer.\u201d Hence the need for further capital. <\/p>\n The November freeze on withdrawals and deposits, Owen said, \u201cwas terrifying for our customers. As you\u2019d imagine, some of them had already been locked up and lost money in both Celsius and BlockFi. So they were thinking, \u2018This is just another one. Everything\u2019s going down.\u2019\u201d <\/p>\n It took a Herculean effort to calm things down, he suggested: \u201cI\u2019ve literally been working days, nights, weekends for 60-plus days solid, speaking to people directly.\u201d He had a mission \u201cto speak to every one of our customers in person.\u201d <\/p>\n Asked about the firm\u2019s customers, Owen said they were primarily individuals and businesses holding and saving Bitcoin for the long term, as BTC is the predominant value on Salt\u2019s platform. Customers are looking to monetize their crypto \u201cwhether it\u2019s for buying real estate, paying bills or whatnot\u201d but they need to have confidence that they can pay off the loan and get their collateral back if they so desire.<\/p>\n Founded in 2016, Salt claims to be the first platform to launch collateralized blockchain-backed loans, though it remains a relatively small player compared with three other firms with which it is often compared: BlockFi, Celsius and Nexo.<\/p>\n But when FTX imploded, Owen said, \u201cit shocked us beyond what we were prepared for\u201d and so \u201c[we] ducked our heads and just said, \u2018We don’t know how bad this contagion is. We’d better figure out exactly where this goes.\u2019\u201d <\/p>\n That\u2019s when the firm decided to \u201cbasically pause our service\u201d to protect capital, Owen said. \u201cThat was something we’d never done before. The business was never planned to be an on-off switch or to be turned on and off.\u201d<\/p>\n A lot of other people were surprised and shocked too, of course, and calls were heard almost immediately for the crypto industry to be better regulated. Is regulation something that crypto lenders are just going to have to live with in the coming years?<\/p>\n \u201cIn our opinion, the regulation is already here,\u201d Owen said. In the U.S., lenders are required to be licensed on a state-by-state basis. The problem wasn\u2019t an absence of laws or rules. \u201cIt was simply that they were not following rules,\u201d according to Owen. Retail customers were encouraged to deposit funds on platforms that were neither banks nor registered securities firms and, in return, were able to earn outsize \u201cyields.\u201d \u201cThat clearly was illegal, and we never did that. I don\u2019t think that that will ever be allowed now that the public is well-informed,\u201d Owen said.\u00a0<\/p>\n Others believe<\/a> 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\u2019s view?<\/p>\n \u201cI do think that banks will get involved when they can, but I don\u2019t think we\u2019re close to that right now,\u201d he said. Recent events have discouraged their participation. \u201cWe\u2019re seeing a lot of pullback.\u201d In fact, many banks today have more appetite for central bank digital currencies than they do for crypto, he believes.<\/p>\n \u201cIf you had asked me a year ago, I would have said that banks were probably getting a lot more interested. If you\u2019re asking me today, I would say they\u2019re probably at least three or four years out.\u201d <\/p>\n Have any lessons been learned in the past year? \u201cThe overarching one is fraud. You have to always watch out for counterparty risk because there are bad actors,\u201d Owen said. But there are some concrete steps that can be taken right now.<\/p>\n \u201cFirst and foremost, it\u2019s the principle of having collateral to back any kind of loan.\u201d So many of the meltdowns of the past year were the result of unsecured lending, according to Owen. \u201cLending can be much safer if you\u2019re lending against an asset that\u2019s overcollateralized.\u201d<\/p>\n A second lesson is transparency, he said. \u201cI think a lot of people feel very taken advantage of because they were told one thing and it turned out to be something else.\u201d And a third lesson, he continued, is the need for capital reserves. There\u2019s no FDIC Insurance for crypto, so having sufficient capital reserves is especially important, \u201cwhich is why we want to ramp up for a large Series B $100 million-plus funding round, because to expand our model, we\u2019re going to require significant capital reserves, much more like a bank.\u201d<\/p>\nA Series B funding round in 2023<\/h2>\n
More regulation needed?<\/h2>\n
Beware of counterparty risk<\/h2>\n