Crypto loans: Winklevoss product exemplified unregulated risks 

The price of bitcoin has passed $20,000 for the first time since November. Ethereum prices are up a quarter in the year to date. But even if the world’s largest cryptocurrencies stabilise, the crypto lending boom should remain on pause.

Crypto lending products advertised high rates of interest for those willing to deposit their tokens. These were used for reinvestment. The trade had looked like a smart way to mimic the interest payable on deposits of fiat money. No longer.

Singapore-based Vauld promoted rates of more than 12 per cent. Gemini, the US crypto exchange founded by the Winklevoss twins, offered 8.05 per cent via its Earn programme.

The eye-catching yields attracted plenty of attention, especially in a world of low rates. When Earn was launched in early 2021, the US federal funds rate was 0.08 per cent.

Lending products were regarded by some investors as less risky than direct crypto investment. The market collapse showed this was a fallacy.

The Earn programme has been a disaster. Gemini loaned tokens to Genesis, owned by Barry Silbert’s Digital Currency Group, which loaned them to its own users. Genesis stopped withdrawals in November, leaving $900mn of Gemini client funds frozen. Creditor groups are now fighting to recover funds.

Tyler and Cameron Winklevoss, social network pioneers turned crypto investors, blame DCG. But surely Gemini must bear responsibility for acting as a middleman to Genesis? Problems are not limited to collateral. The SEC has charged Gemini and Genesis with offering and selling unregistered securities.

Regulators’ worries of deficient investor protection in crypto lending products were well-founded. Investors had little information about how their tokens were being used and what risks were taken. Two other crypto lenders, Celsius and BlockFi, have entered bankruptcy.

Such collapses show that the idea of “safe” and “risky” crypto products is an illusion. Without a comprehensive regulatory framework for the sector, all digital asset trades are equally dangerous.

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Business Asia
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