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Crypto Lending Makes a Potentially Risky Comeback

Facing declining revenues, cryptocurrency exchanges are boosting their lending offerings.

But the move by companies such as Binance and Coinbase could introduce new risks to the market less than a year after the last big crisis, Bloomberg reported Monday (Oct. 16). And so far, these offerings haven’t shown any sign of reigniting trading.

“It could backfire on them for sure,” Hilary Allen, a professor at American University Washington College of Law, who studies the impact of new technologies such as crypto on financial stability said in the report. “Any time you take an asset and lend it out, you are creating leverage, and it creates fragility. I think the crypto industry in general is trying everything right now in a sort of existential struggle.”

Aggregate data on crypto exchange lending programs isn’t available, although the last few months have seen several exchanges debut new offerings, according to the report.

For example, Coinbase announced in September it was launching a digital asset lending program for its institutional Prime clients.

“Coinbase is working to update the financial system that was built over 100 years ago, leveraging crypto to provide people with more economic freedom and opportunity,” a company spokesperson told PYMNTS at the time.

“To advance this purpose, Coinbase is building the most trusted crypto products and services and supporting other builders to bring 1 billion people into crypto,” the spokesperson said.

The Bloomberg report also provided the example of Binance’s past offers of one-hour, zero-interest margin loans.

These efforts showcase the fierce competition for market share as trading volumes are still close to 90% below where they were when FTX collapsed last year, per the report.

“Crypto’s ongoing bear market is possibly best exemplified by the industry’s fundraising data,” blockchain intelligence firm Messari reported Oct. 5. “Q3 2023 was no exception to the multi-quarter downtrend we’ve witnessed since the beginning of 2022 — Q3 marked new lows in both overall funding amounts and deal counts that have not been seen since Q4 2020.”

The report showed the industry logging less than $2.1 billion for fewer than 300 deals, a 36% drop from the prior quarter. Most of the deals came from early-stage rounds, with seed funding making up $488 million of the total.

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