LONDON/WASHINGTON – Sept 21 (Reuters – Scott Odell, an analyst from Blockchain.com in the UK, instantly messaged Edward Zhao of Three Arrows Capital, asking for repayment of at least a portion of a $270 Million loan to the Singapore hedge fund.
The collapse of cryptocurrency Terra just hit three Arrows. This raised doubts about its ability to repay. This was a concern for Blockchain.com, as it hadn’t taken collateral to secure its loan, court filings reveal.
Odell stated that the repayment was urgent and suggested that they be arranged if possible.
Zhao seemed lost for words.
He replied, «Yo,»
«uhh»
«hmm»
Three Arrows filed for bankruptcy on July 31, and Blockchain.com informed Reuters that it has not been able to repay a cent of its loan. The hedge fund liquidators filed affidavit documents as part of the liquidation proceedings.

Three Arrows declined to comment on requests. Zhao was not able to reach Reuters, and Odell declined to comment.
According to Reuters, the loan was part of an opaque web of unsecured lending between crypto-companies that left the sector exposed when cryptocurrency prices crashed by 50% earlier this year.
Institutional crypto lending is where cryptocurrencies are loaned in exchange for cash. Lenders can waive the requirement that borrowers provide collateral, such as stocks, bonds, or other crypto tokens, in order to charge higher rates and increase profits. Borrowers can also generate quick cash.
According to Lane Kasselman, Blockchain.com’s chief business officer, unsecured lending had been 10% of the company’s revenue. He stated that «we’re not willing in the same level risk,» but added that the company would still offer «extremely restricted» unsecured loans for top clients under certain conditions.
According to interviews and filings, unsecured lending is now common in the crypto industry. Many industry insiders believe that the practice will continue despite the recent shakeout.
Alex Berry, the chief analyst for financial institutions at S&P Global Ratings, said that the crypto industry was actually broadly seeing a trend toward unsecured lending. He said that the fact that crypto is a «concentrated environment» increases the risk of contagion in the sector.
He said that if lenders are limited to those who are part of this ecosystem and particularly if there are fewer of these counterparties, then you will witness events like the one we just witnessed.
CRYPTO BOOM and BUST
The de facto bank of crypto, crypto lenders, flourished during the pandemic. They offered double-digit returns on their deposits and attracted retail customers. Hedge funds, which were looking to place leveraged bets, paid higher interest rates to borrow funds from lenders. They also made a profit from the difference.
Although crypto lenders do not have to maintain liquidity buffers or capital, they can be exposed if they are unable to pay large losses.
Voyager Digital was one of the most significant casualties of the summer, filing for bankruptcy in July. This is a glimpse into the rapid growth and unsecured crypto lending.
According to regulatory filings, the crypto loan book of the New Jersey-based lender grew from $380m in March 2021 to approximately $2 billion in March 2022. It took collateral for only 11% of that $2 Billion.

After Three Arrows failed to pay a crypto loan amounting to more than $650m, the lender was forced to collapse. Voyager didn’t report liquidating collateral for the loan, whereas Three Arrows did. Voyager bankruptcy filings showed that Three Arrows had listed their collateral status with Voyager at «unknown.»
Voyager declined to comment on this article.
Celsius Network, a rival lender, also filed for bankruptcy in August. Court filings indicate that they offered unsecured loans, but Reuters couldn’t determine the scale.
Private loans make up the majority of the industry’s unsecured lending. However, even business people can give wildly different estimates.
Arkham Intelligence, a crypto research firm, put the figure somewhere in the range of $10 billion, while TrueFi, a crypto lender, said it was at least $25 billion.
Antoni Trenchev is the co-founder and CEO of cryptocurrency lender Nexo. He stated that his company turned down requests from traders and funds for unsecured loans. He said that uncollateralized lending in the industry was worth tens to billions of dollars.
BULLISH ON BORROWING
Although Blockchain.com has made a significant reduction in unsecured lending, many cryptocurrency lenders are still confident about this practice.
Reuters interviewed 11 lenders, and they all said that they would continue to provide uncollateralized loans. However, they didn’t specify how large their loan portfolio would be.
BlockFi’s global head of trading, Joe Hickey, said that it would continue to offer unsecured loans to only top clients who have had their financials audited.
According to BlockFi, a third of its $1.8 billion loans were unsecured as of June 30, according to the company. It was rescued by crypto exchange FTX in July after it cited losses on loans and increased customer withdrawals.

Hickey stated that «I believe our risk-management process saved us from having larger credit events.»
A growing number of peer-to-peer lending platforms, including Voyager and Celsius, are also looking to fill the void left by the exits of central players like Celsius.
Sid Powell, CEO, and co-founder of Maple, an unsecured crypto lending platform, stated that institutional crypto lenders were more cautious following Three Arrows’ bankruptcy, but conditions have since improved, and lenders are comfortable lending unsecured.
True and Atlantis executives said that they had seen an increase in demand from market makers as they continue to look for unsecured loans.
Brent Xu, CEO at Umea, another peer-to-peer platform, stated that the crypto industry will learn from its mistakes and that lenders would do better by extending loans more diversely to crypto companies.
He said that this would include firms looking to acquire or fund expansion and not just those who leverage trades on crypto prices.
Xu stated, «I am very bullish about the future of unsecured lending and borrowing.»
MILLION DOLLARS OF BITCOIN

Many crypto loans can be secured. That is a fact. However, even then, many crypto loans are secured with volatile tokens, which can lose their value quickly.