2022 was a watershed year for the digital asset space, with several of the industry’s most established names flaming out in dramatic fashion – and the lending market was no exception. The demise of FTX left several firms unable to meet their obligations to creditors, leading them to declare bankruptcy and placing profound constraints on both the institutional side (Genesis) and the middle market (BlockFi/Celsius). The fall of Three Arrows Capital, precipitated by the Terra/Luna collapse, created a crisis of confidence in lenders’ ability to monitor and effectively manage collateral. Other players met their end due to toxic combinations of commingling, rehypothecation and general mismanagement.
2023 was a much quieter year in crypto – perhaps a healthy development for everyone’s blood pressure, but not for the market at large. Lending is absolutely critical for the growth of a robust trading ecosystem, but while some crypto-native firms have dipped their toe back into these waters, much of the activity has been tepid at best. With limited access to funds – combined with a lack of regulatory oversight and a general negative sentiment stemming from the turmoil of the past 18 months – most institutions have remained on the sidelines.
That hesitancy is incompatible with transformation. To help this asset class reach its full potential – with all market participants and industry stakeholders able to access the diversification, flexibility and potential for returns it offers – the largest players need easy, responsible access to digital assets. In many ways, the opportunity to lay a foundation for a new wave of institutional crypto adoption, supported by sound lending practices, has never been greater – but it’s going to require the market to mature, and fast.
How? By applying all the lessons we’ve learned from recent years.
Four Keys for Crypto Lending’s Coming-of-Age Story
Digital asset lending has some growing up to do, and the best way to accomplish that is to look at the markets that have come before it. Some of the practices outlined below might seem straightforward – but if they were really that obvious, the market turmoil of 2022 would have played out much differently. By adhering to the below principles, lenders can ensure that institutional borrowers’ first steps into digital assets are on stable ground.
The Future: A Foundation for Regulation
We’ll close with a few thoughts on how this responsible lending model might point to the future of digital assets. This industry has shown a remarkable hunger for regulation – institutional players overwhelmingly want a defined framework so they can feel confident in where and how to conduct their business. Certain regions have been more active on that front than others, but with disagreement both among and within jurisdictions, there is an overall cloud of uncertainty.
Innovation shouldn’t have to wait for that clarity to come, much as we might want to align their schedules. So what’s the way forward? Our answer: stability, judicious management and an unwavering prioritization of client interests. By abiding by the principles outlined above, lending desks can inspire more institutions to get into the market in the short term. This will yield a surge in activity that will fuel even greater adoption, create demand for more innovative products and increase the pressure on regulators to provide true oversight. Finally, with clear frameworks for crypto regulation in markets around the world, the floodgates will open and digital assets will become as ubiquitous and accessible as their traditional counterparts.
It adds up to a virtuous cycle of adoption, and responsible lending is a key ingredient. This industry has been through a lot in just a few short years, but sometimes hardship is the best teacher. It’s time for digital asset players to put these lessons to work and write the coming-of-age story that this space so badly needs.