Sebastian Sinclair

<div id="highlights-block_62c6232f8b8e8" class="highlights">
 <ul>
 <li>The crypto lending market has been shaken by poor risk management and recent bankruptcy filings</li>
 <li>Anchorage Digital said it has steered its ship by opting into a regulated regime early and by offering lower than market average lines of credit</li>
 </ul>
 
</div>



Amid bankruptcy filings and sector-related layoffs, crypto lenders have been dealt a substantial blow.



<a href="https://cms.blockworks.co/voyager-files-for-bankruptcy-days-after-freezing-withdrawals/" target="_blank" rel="noreferrer noopener">Voyager Digital</a> became the latest major crypto lender caught up in the downfall of Singapore-based hedge fund firm Three Arrows Capital (3AC) on Wednesday. The lender has filed for Chapter 11 bankruptcy in the Southern District of New York.



Less than a week prior, 3AC filed for <a href="https://cms.blockworks.co/3ac-files-for-bankruptcy-as-co-founders-location-unknown/" target="_blank" rel="noreferrer noopener">Chapter 15 bankruptcy</a>, four days after being <a href="https://cms.blockworks.co/three-arrows-capital-ordered-into-liquidation-by-bvi-court-report/" target="_blank" rel="noreferrer noopener">ordered into liquidation</a> by a British Virgin Islands court. The location of 3AC&#8217;s co-founders Kyle Davies and Zhu Su remains unknown.



Questions over the legitimacy of and the need for increased <a href="https://www.afr.com/technology/depression-like-crashes-inevitable-without-crypto-controls-expert-20220703-p5ayps" target="_blank" rel="noreferrer noopener">regulation</a> have begun to find a footing following the industry&#8217;s upheaval in recent weeks.



Many of the sector&#8217;s larger lenders, including <a href="https://cms.blockworks.co/celsius-withdrawal-halt-reveals-run-risks-on-other-crypto-banks/" target="_blank" rel="noreferrer noopener">Celsius</a>, <a href="https://cms.blockworks.co/babel-finance-working-to-ease-unusual-liquidity-pressures/" target="_blank" rel="noreferrer noopener">Babel Finance</a> and <a href="https://cms.blockworks.co/vauld-stops-withdrawals-eyes-restructure-after-users-pull-nearly-200m/" target="_blank" rel="noreferrer noopener">Vauld</a>, have paused withdrawals as a result of extreme market conditions and a liquidity crunch impacting other sectors in the industry, including <a href="https://cms.blockworks.co/coinflex-plans-to-raise-missing-funds-with-new-token/" target="_blank" rel="noreferrer noopener">exchange providers</a>.



As a result of the ongoing turmoil, crypto prices — reflected predominantly in the bellwether asset bitcoin — have sunk from their November all-time highs. Bitcoin was last seen changing hands for around $20,400, up slightly on the day, but down more than 70% from its November high of $69,000. 



Bitcoin&#8217;s leg down from around $36,000 — seen at the time of Terra&#8217;s UST stablecoin collapse on May 7 — demonstrates that, at the time, confidence was already waning. Bitcoin has since tanked a further 30% from $30,000 witnessed on June 8 — days before Celsius halted withdrawals — to current levels.



&#8220;The issues of large players such as Celsius and 3AC have triggered massive withdrawals of client funds from&nbsp;several crypto platforms offering lending, borrowing and trading services,&#8221; Milosz Papst, director of UK-based investment research firm Edison Group, told Blockworks in an email.



He said many of the industry&#8217;s platforms have suffered even though only a few of the industry&#8217;s firms were found to have been exposed to 3AC and Celsius.



On Wednesday, Digital Currency Group (DCG)-backed crypto brokerage firm Genesis <a href="https://cms.blockworks.co/genesis-reveals-exposure-to-bankrupt-three-arrows-capital/" target="_blank" rel="noreferrer noopener">confirmed it too had been exposed</a> to 3AC for an undisclosed loan amount with&nbsp;a weighted average margin requirement of over 80%.



DCG has assumed certain liabilities of Genesis related to 3AC to ensure Genesis has the capital on hand to operate and scale its business for the long term, CEO Michael Moro said in a <a href="https://twitter.com/michaelmoro/status/1544733042849320960?s=20&amp;t=bLrqNDjrD2U1kVrKjtOTug" target="_blank" rel="noreferrer noopener">tweet</a> Wednesday.



<h3 class="wp-block-heading">Navigating risk</h3>



Some, like institutional lending firm Anchorage Digital, remain steadfast. &#8220;Buoyed&#8221; by what it views as significant risk management and appropriate counterparty credit analysis, Anchorage said it has continued to steer its ship safely along rocky shores by ensuring it knows exactly which borrower counterparties it onboards.



&#8220;From our point of view, our risk management was properly attuned to the inherent risk in the market,&#8221; Nathan McCauley, co-founder and CEO of Anchorage, told Blockworks in an interview Wednesday. &#8220;Once we have borrowers on board, we are constantly assessing their credit.&#8221;



He said his company regularly asks those borrowers to provide quarterly statements or other ongoing updates on their financial health. 



Founded in 2017, Anchorage Digital is a regulated crypto platform providing institutions with integrated financial services and infrastructure. The platform also offers custody solutions to large clients.



The lender is home to the world&#8217;s first federally-chartered digital asset&nbsp;bank and boasts the likes of Paradigm&#8217;s chief legal officer, Katie Biber, and Andreessen Horowitz general partner Chris Dixon as board members.



3AC, meanwhile, <a href="https://cms.blockworks.co/newsletter/daily/?id=28278879" target="_blank" rel="noreferrer noopener">reportedly borrowed</a> from Voyager at a rate of 12% on an uncollateralized basis before depositing in Terra&#8217;s lending and borrowing protocol, Anchor, at a rate of 19%. After Terra&#8217;s collapse some, including 3AC, were caught with their pants down as the price of LUNA — the native Terra token attempting to backstop its stablecoin UST from depegging — fell sharply. 



&#8220;Generally speaking, if you&#8217;re going to be doing under or uncollateralized lending&#8230;you have to have very good counterparty credit analysis,&#8221; McCauley said when asked about the current state of affairs for the crypto lending market. &#8220;It is possible to do that safely.&#8221;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">&#8220;Your risk management systems have to be extremely good. And even in that case, you&#8217;re still subject to surprising market events that might take place.&#8221;</blockquote>



Before filing for bankruptcy, Voyager issued 3AC a default notice on $650 million in unsecured loans. Blockworks has repeatedly reached out to 3AC but has not yet received a response.



&#8220;There was a lot of things going on in the markets that have turned out to have been unsafe,&#8221; McCauley said. &#8220;When we looked at building our book, we wanted to build a lending book with realistic APYs that allowed our lender clients to preserve capital and not lose their principal because we were getting them into difficult or potentially unsafe loans.&#8221;



When asked, Anchorage declined to publicly disclose how much it offered in yearly percentage yield terms, though the firm said it does offer institutional clients up to 5.15% annual percentage returns on bitcoin loans, up to 3.97% on ether and 9.58% on USDC.



<h3 class="wp-block-heading">Can lenders stay afloat?</h3>



Amid the liquidity crisis and bankruptcy filings, Anchorage said last month in a <a href="https://medium.com/anchorage/the-path-forward-for-crypto-lending-a73134fa5a28" target="_blank" rel="noreferrer noopener">blog post</a>, while it wasn&#8217;t the first to the lending market and didn&#8217;t offer the largest lines of credit, it was because of its &#8220;measure twice, cut once&#8221; approach that the firm has managed to keep its head above water.



Anchorage said it does not deploy capital in decentralized finance nor use its capital to fund investment “strategies,” when compared to other competitors in the market.



&#8220;Despite the fact that the market went through extreme volatility and a lot of people were found to not be doing risk management appropriately, we had a very large book and managed it flawlessly throughout,&#8221; McCauley said. 



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">&#8220;We&#8217;re pretty confident that we can go through similarly situated cycles.&#8221;</blockquote>



The co-founder added while additional regulation may help shield retail investors from current market woes, it is already possible for lenders to opt into being regulated in their lending programs.



Celsius is not registered with the Securities and Exchange Commission and neither is Anchorage, though the Anchorage Digital Bank National Association is chartered by the US Office of the Comptroller of the Currency.



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Crypto Lenders in Turmoil as Markets Reel From ‘Unsafe’ Risk Management

Tanaya Macheel

<div id="highlights-block_605cba54e186d" class="highlights">
 <ul>
 <li>NYDIG CEO Robby Gutmann revealed that unnamed sovereign wealth funds have been approaching the firm with inquiries about buying bitcoin</li>
 <li>Real Vision CEO Raoul Pal mentioned that Singapore Exchange and state-owned investment firm Temasek Holdings has been buying bitcoin. </li>
 </ul>
 
</div>



On Wednesday, <a href="https://cms.blockworks.co/nydig-closes-200m-round-from-institutional-investors/" target="_blank" rel="noreferrer noopener">NYDIG</a> CEO Robby Gutmann revealed that unnamed sovereign wealth funds have been approaching the firm with inquiries about buying bitcoin, at Real Vision’s online Crypto Gathering event.



In the same conversation, former global hedge fund manager and Real Vision CEO Raoul Pal mentioned that Singapore Exchange and state-owned investment firm Temasek Holdings has been buying bitcoin. Temasek is known to be the higher risk-leaning fund of Singapore’s two sovereign wealth funds.



Sovereign wealth funds, the investment arms of cash-rich nations, are coming for bitcoin as they look at new strategies to protect their interests after the last 18 months of global economic turmoil. Combined, they have almost <a href="https://www.swfinstitute.org/fund-rankings/sovereign-wealth-fund" target="_blank" rel="noreferrer noopener">$8 trillion in assets under management</a> as of December, according to Sovereign Wealth Fund Institute.



Last month GIC, Singapore’s more conservative sovereign wealth fund, led an $80 million investment in Anchorage, the US-based “crypto bank” for financial institutions. Anchorage president Diogo Monica told Blockworks at the time that other sovereign wealth funds are, like GIC, “<a href="https://cms.blockworks.co/anchorage-raises-80-million-as-banks-seek-to-solidify-bitcoin-strategies/" target="_blank" rel="noreferrer noopener">waking up to crypto</a> and coming in in a meaningful way.”



Anchorage CEO Nathan McCauley is also on record saying the company is <a href="https://decrypt.co/60059/bitcoin-senator-lummis-crypto-tax-reform" target="_blank" rel="noreferrer noopener">speaking with several state governments</a> about adding crypto to their treasuries.



And though Norway’s Oil Fund, one of the <a href="https://cms.blockworks.co/the-end-of-the-petrodollar/" target="_blank" rel="noreferrer noopener">top sovereign wealth funds in the world</a> with more than $1.3 trillion in AUM, only holds bitcoin indirectly (through its 2% stake in MicroStrategy), it could be the next state government to buy it. Earlier this month Aker ASA, a 180-year-old Norwegian industrial holding company with ownership in oil and gas services companies, <a href="https://cms.blockworks.co/norwegian-oil-giant-aker-makes-long-play-for-bitcoin/" target="_blank" rel="noreferrer noopener">created a unit dedicated to investing in bitcoin</a> and has about $58.6 million in it now. 



Based on what <a href="https://cms.blockworks.co/fidelity-enters-the-bitcoin-etf-race/" target="_blank" rel="noreferrer noopener">institutional demand</a> has <a href="https://cms.blockworks.co/goldman-sachs-files-for-cryptocurrency-tied-etf/" target="_blank" rel="noreferrer noopener">done for bitcoin</a> in the last five months, sovereign wealth backing would probably bring even more legitimacy and adoption to the digital asset class.

Nathan McCauley

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