Monday, 27 March 2023

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Genesis Capital’s fall might transform crypto lending — not bury it

Genesis Capital’s fall might transform crypto lending — not bury it

Is crypto lending dead, or does it just need better execution? That’s a question asked with more urgency in the wake of Genesis Global Capital Jan. 19 bankruptcy filing. That, in turn, followed the demise of other prominent crypto lenders, including Celsius Network and Voyager Digital in July 2022, and BlockFi, which filed for Chapter 11 bankruptcy protection in late November 2022.

Unlike many traditional creditors, like banks, cryptocurrency lenders aren’t required to have capital or liquidity buffers to help them weather hard times. The collateral they hold — cryptocurrencies — typically suffer from high volatility; thus, when markets plunge, it can hit crypto lenders like an avalanche.

Edward Moya, a senior market analyst at Oanda, told Cointelegraph, “The demise of crypto lender Genesis reminded traders that there still needs to be a lot more cleaning up in the cryptoverse. You don’t need exposure to FTX to go under and that theme might continue for a while for many distressed crypto companies.”

Echoing those comments, Francesco Melpignano, CEO of Kadena Eco, a layer-1 blockchain, expects to see “contagion from these meltdowns continue to reverberate this year and maybe the next few.”

‘It’s a failure of risk management’

Is crypto lending kaputt? It’s a question Duke University finance professor Campbell Harvey was asked lately. His answer: “I don’t think so.” He believes the business model remains sound and there is a place for it in future finance.

Many traditional loans today are overcollateralized, after all. That is, the collateral provided may be worth more than the loan, which is unnecessary from a borrower’s point of view and makes for a less efficient financial system. Of course, the problem with many crypto lending transactions is the opposite — they are undercollateralized.

However, a safe middle ground could be reached if one applies professional risk management practices to crypto lending, said Harvey, co-author of the book, DeFi and the Future of Finance

He believes that those bankrupt crypto firms failed to plan for worst-case market scenarios and it wasn’t for lack of knowledge. “Those people knew crypto’s history,” Harvey told Cointelegraph. Bitcoin (BTC) has fallen more than 50% at least a half-dozen times in its short history and lenders should have made provisions for significant drawdowns — and then some. “It’s a failure of risk management,” said Harvey.

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