The future of crypto lending must be safe and sustainable - Ledn's Di Bartolomeo
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(Kitco News) Crypto lending protocols have been through the wringer over the past year as several popular platforms, including Genesis, Celsius, Voyager Digital and BlockFi, have had to file for bankruptcy in the wake of the collapse of the Terra decentralized stablecoin ecosystem and the FTX cryptocurrency exchange.
To get an insider perspective on the outlook for crypto lending moving forward, Kitco Crypto spoke with Mauricio Di Bartolomeo, Co-Founder and CSO of Ledn, a Canada-based global digital asset savings and credit platform.
Addressing the most pressing question for many crypto traders, Di Bartolomeo suggested that after the failure of some of the most significant industry players over the past few months, the team at Ledn “believe the worst is behind us as an industry.” He hopes the industry as a whole applies the lessons learned to ensure that this never happens again.
“Unfortunately, we’re skeptical that all other players have learned their lesson,” he warned. “With the failure of some of the largest CeFi projects, it appears that some institutional borrowers are attempting to go directly to family offices and high net worth individuals to secure uncollateralized loans on the same terms as before. This just restarts the risk cycle that was exposed with the collapses of 3AC and FTX.”
Di Bartolomeo called on experienced lenders with “true robust credit underwriting and credit monitoring policies” to ensure that digital asset lending evolves and improves.
As for what can help prevent the events of 2022 from reoccurring, Di Bartolomeo highlighted the need for improved risk management policies that prioritize the safety and security of client assets, which he suggested should become industry standards.
Other recommendations include carefully selecting the assets that are supported for institutional lending, not issuing a platform token, employing robust risk underwriting policies with stringent requirements to onboard new borrowers, and conducting regular proof-of-reserve attestations that allow clients to verify that their assets are accurately accounted for.
Ledn was the first-ever lender to establish an ongoing proof-of-reserves attestation process that its clients can verify, Di Bartolomeo said. It’s Ledn’s view that there should be global standards in the lending and borrowing markets, just like in the world of traditional finance.
“We believe in regulation that protects clients by ensuring all lenders provide clear and transparent disclosures. We don’t believe that regulation needs to or should restrict access for large percentages of the population. Lending is a key part of any efficient market and the digital asset industry is no different.”
Poor risk management
Getting into the specifics of what led to the downfall of firms like Celsius and Genesis, Di Bartolomeo noted that “not all risk management is created equal,” and suggested that some lenders adopted risky practices in an effort to drive greater profitability.
“To grow, they started supporting highly speculative tokens and offering higher yields – both meant taking on more risk,” he said. “It is evident that some lenders didn't properly assess the risk of specific borrowers and of their lending activities.”
Major pitfalls highlighted by the CSO included participating in highly speculative schemes such as Terra/Luna, poor risk underwriting, and concentration risk.
“While no one can underwrite for fraud (e.g. FTX/Alameda), clearly underwriting standards differed across the industry and many failed this stress test,” Di Bartolomeo said. “Many lenders had loaned way more than the risk that they could possibly absorb with one counterparty.”
The future outlook for crypto lending platforms
Moving forward, the need for lending isn’t changing, Di Bartolomeo said, as the digital asset industry still needs financing and clients are looking for partners that will help them manage their assets prudently and responsibly.
As an example, he noted that during the 40% rebound in BTC that occurred in January, Ledn saw a 240% increase in its loan originations vs. December 2022.
“Our focus is on innovation that increases transparency, client control and access,” he said. “Digital asset holders should be able to create a loan that fits their individual circumstances and preferences, no matter where they are in the world.”
As the platform looks to make its product offerings more appealing, it has future plans to allow clients to customize their loan terms, interest rates, principal amount, “and hopefully a few more things that we can’t disclose right now.”
How CBDCs factor into crypto lending
On the topic of central bank digital currencies (CBDCs), Di Bartolomeo suggested that their impact on the lending sector will “depend on the design principles that central banks and governments use when creating their CBDCs.”
“Conceptually, CBDCs could disintermediate local private banking systems and make financial services more accessible. However, this also comes with privacy concerns and potential large disruptions to the way our financial systems function today,” he warned.
Due to the potential disruption that they can cause and the pushback being seen from the banking system, the team at Ledn holds the view that traditional lending is unlikely to be affected by the integration of CBDCs. Instead, he believes they are more likely to have an impact on how interbank settlements work.
“However, the simple discussion around CBDCs is helpful in accelerating the general public’s understanding of digital currencies,” he added. “This will likely push them to better alternatives like bitcoin and certain existing stablecoins.”
Part of the reason that Ledn was able to avoid the same fate as Genesis and Celsius is due to the fact that along with focusing on generating returns from clients’ assets, the firm also made the return of those assets a priority, “which is evidently different from the prioritization of others,” Di Bartolomeo said.
“This is the greatest difference in Ledn’s business model,” he added. “The general premise of our business is quite simple. We make a spread on the cost of funding versus the return on lending. Therefore, we don’t support any assets that don’t have a return on lending.”
Due to these requirements, Ledn only supports lending of Bitcoin (BTC) and USD Coin (USDC), and the firm is very strict about how and to whom it lends assets.
“What we don’t do is offer unsustainable yields to our clients, or invest in multi-year investments when our clients can withdraw their assets at any time,” Di Bartolomeo said. “We don’t issue our own token, nor do we force our clients to buy it to ‘get a better deal.’ And we don’t support speculative tokens just because they get trending.”
To help improve the landscape of the crypto ecosystem and prevent a repeat of 2022, Ledn supports the creation of global standards in the lending and borrowing markets, and they are currently exploring opportunities to work with other top-tier participants in the industry to create responsible standards.
For Di Bartolomeo, the most significant hurdle the industry faces currently is the rebuilding of trust. “With so many clients and investors impacted by the fraudulent practices of various bad actors, it will take some time for the everyday investor to feel comfortable coming back,” he said. “We’re focused on building the best digital asset lending platform in the world because we know that clients around the world need our services despite a few bad actors.”