Coinbase $COIN, Nexo, And BlockFi - A Drastic Change In The Crypto Lending Space Is Lurking
When Coinbase joins the Crypto Lending Space, it will change the landscape entirely, nearly quadrupling the size of this market.
After Coinbase (COIN) announced its plans to initiate a lending service on its platform, the SEC intervened and threatened to take legal actions against Coinbase if it proceeded. This creates further discussion around the whole crypto-lending industry, why other platforms already initiated their lending platforms, and why Coinbase can't yet.
A few months ago, I wrote about different Crypto-Lending Platforms (CLPs) like BlockFi and Nexo (NEXO-USD). To readers that are not too familiar or need a refresher with CLPs, I highly recommend reading my previous articles before diving deeper into this one.
My first article is titled - "Nexo - A Risk Analysis And A Customer's Review," - where I discussed Nexo's token, the risks associated with holding your money at Nexo, and how Nexo earns its money.
My second article on this matter is titled - "Crypto-Lending Platforms Add Liquidity But Also Leverage To The Market," - where I discussed the effects and risks of these platforms on the crypto market in the event of a substantial market downturn.
BlockFi and Nexo offer high-yielding interest accounts to their customers in exchange for the capital stored within their platform and used for lending purposes to other users and institutions. They offer interest on various coins like Bitcoin (BTC-USD), Ethereum (ETH-USD), USDT (USDT-USD), USDC (USDC-USD), PAXG (PAXG-USD), and much more that are stored on their platform.
Coinbase wants to offer the same lending services in exchange for interest-yielding accounts. Due to Coinbase's size and reach, the SEC intervened and labeled the lending services as a security, which would make them subject to pre-clearance and reporting requirements.
Coinbase currently holds around $223bn worth of assets on its platform. If Coinbase can initiate the offering, I expect to see some significant changes in the interest rates offered by all the other crypto-lending platforms.
Other CLPs like Nexo and BlockFi offer those services. Still, they do not fall under close scrutiny as they're circumventing by stating clearly that they are unregistered securities and that investors take the risk of default by investing on their platform. Many states are beginning to look further into this matter and order BlockFi to stop their service in their state.
When Coinbase joins this space, it will change the landscape entirely nearly quadrupling the size of this market. This could be bullish for Coinbase as institutions are interested in lending services on this scale.
Crypto-Lending is lucrative
The business is simple. Borrow at less than you lend. That means that Nexo and BlockFi pay their users anywhere between 2-12% interest and lend at rates considerably higher than those. Those 12% interest rates that we see in some places are special situations where the interest is paid with the platform's own token.
Depending on the demand, market volatility, and volume CLPs adjust their interest rates on a near-monthly basis. BlockFi changed its interest rates just a few weeks ago towards the upside.
For Nexo, it's a bit more complicated as it offers multiple tiers and ways to increase the interest users can earn.
By default, money on Nexo earns up to 3% interest APY. By agreeing on a Fixed Term, meaning you assure Nexo that you'll leave your money on the platform for a specific amount of time, you can add another 5% interest. By increasing the amount of Nexo tokens relative to all your other assets, you can increase your interest rates by another 2%. Last but not least, if you agree that Nexo pays you your interest in their own Nexo tokens, you can add another 2% interest, which results in the maximum of 12% interest on stablecoins and fiat.
Other CLPs like Celsius or Gemini work similarly. Depending on the size of the CLP and interest from institutional investors, the interest rates vary from platform to platform.
DOA - Depends on Amount
STA - See Tiers Above
GD - Gemini Dollar
AUM - Asset Under Management
CLPAUMStablecoin APYBitcoinEthereumPAX GoldBlockFi~$15bn5-8% (DOA)0.1-4.5% (DOA)0.25-5% (DOA)0.1-3.25%Nexo~$10bn3-12% (STA)2-8% (STA)2-8% (STA)2-8% (STA)Coinbase$223bn0%0%0%0%Gemini$30bn8.05% (GD)1.49%2.05%1.81%Celsius$20bn8.88%3.51-6.20% (DOA)5.05-5.35% (DOA)5.5%
Source: Table by Author - Information from companies' websites
The table above contains the assets under management and interest rates paid by different CLPs on the market. They vary strongly depending on the size of the platform and their offer structure.
It seems like Nexo dwarfs the other platforms, but only if you accept receiving your interest payment in their Nexo token, which is highly volatile.
The most significant source of income for CLPs is not the lending business with individuals but with large institutions like market-makers, funds, exchanges, and family offices that need access to crypto for trading strategies or hedging instruments in their funds.
BlockFi describes in more detail the products and services they offer to institutional investors here. Since there are no reporting requirements, it's difficult to generate more insights about this space.
On the other side, investors like me take the risk that my money is uninsured on these platforms. In the case of a hack of complete default, my money is gone, and there is no way to get it back. Another way users pay for these high interests is by not knowing what exactly happens behind the curtains.
The same is true for any other CLP.
Why are interest rates adjusted so frequently?
The short answer is - Risk Management.
Interest rates depend like nearly anything else on the market on supply and demand. If there is little demand for lending, the CLPs must adjust the yields downward. If there is high demand for crypto loans from institutions, the CLPs adjust the interest rates upwards.
Then there is competition. To attract a large enough user-base to the platform, CLPs offer high attractive yields for customers to leave their money with the platform.
Another factor is the supply of assets on these platforms. If the demand for loans is high and increasing and the supply remains steady, the platforms can demand higher interest on the loans and offers higher yields.
With crypto loans, another significant factor is the market-price volatility. These CLPs offer loans only to users that can cover the loans with the assets they're holding. If you have $1000 in Bitcoin, you can only take a loan worth 50% of your Bitcoin holdings. The Loan-To-Value ratio is an important aspect here. If Bitcoin's price suddenly falls 40%, the CLPs automatically execute a margin call to cover the loan with the assets the user is holding.
If Bitcoin's price decreases drastically within a specific time the risk for automatic margin calls increases, and the interest rates are adjusted accordingly.
Coinbase's impact on the CLP industry
When Coinbase joins the CLP market, it would immediately triple or even quadruple the size of the market. Coinbase's reputation and large AUM would make it a very attractive partner for large institutions.
This would lead to drastic price competition within the industry, and the CLPs' customers would need to say goodbye to 12% yields!
On the other hand, this could be a very lucrative business for Coinbase pushing its revenue, operating income, and net income further upwards.
Source: Chart by Author - Data from SeekingAlpha
It's not a question of whether Coinbase will start offering crypto lending services but when it will start. Coinbase's initial plan is to provide customers with 4% APY on USDC tokens, which falls in the industry's lower range of interest offerings.
The other CLPs must certainly decrease the yields a few percentage points down to remain competitive with Coinbase.
The SEC considers Crypto Lending a Security
The delay is partly because Coinbase is a publicly traded company and that it works with regulators to comply with rules and regulations.
The SEC published a statement, considering crypto lending a security, and that they will sue Coinbase if they start offering crypto lending services.
The case is based on the Howey and Reves case law that determines if an asset is a security. Usually, stocks, notes, security-based swaps, bonds, debenture, and similar are considered securities, subject to pre-clearance and reporting requirements of rule 204A-1 under the IAA.
The supreme court set four criteria to determine whether a contract is a security or not:
An investment of money
In a common enterprise
With the expectations of profit
To be derived from the effort of others
I'm not a lawyer, but I'm sure that there is a lot of 'grey zone here where lawyers and regulators can discuss heavily if those lending activities are considered securities or not.
That's also because none of these platforms uses US-$'s for any of these purposes but stable coins, which are tokens and not backed by the US government. While the FDIC insures bank savings accounts against defaults, these CLPs are not.
They partly use this grey zone with the tokens to circumvent that they are not trading securities on their platforms. A few states in the US already decided that a few of the services these CLPs offer aren't lawful, and users in these states can't take advantage of high-interest accounts.
Going a step further, CLPs like BlockFi or Nexo clearly state that they offer unregistered securities.
Coinbase wrote in a statement that they are working with the SEC to launch a product that applies to the regulatory requirements.
Regulation is coming, and that's good
After Bitconnect, a CLP from 2017/18, shut down in 2018, this industry came under scrutiny from regulators. Bitconnect offered impossibly high-interest rates (1% daily) to users. They were suspected to be a Ponzi Scheme, using assets from new users to pay off the interest of older users to remain credible.
The CLP industry is still a wild west market where users don't know how the companies manage their assets, where large grey zones with stable coins are exploited to generate massive returns. Each of the CLPs mentioned in this article initiated programs or work with different institutes to observe and legitimize their business behavior and assets.
Nexo works with the auditor Armanino LLP that audits Nexo's assets in real-time to provide insights into how it is managing its users' capital.
BlockFi works similarly, being licensed and regulated by different institutions. They work with companies like Gemini, BitGo, and Coinbase to ensure their assets are safe.
To handle the rapid pace of the crypto environment, regulators must change regulations, processes, and licenses to cope with the changing demand of the market. A quarterly report with assets that can be tracked on the blockexplorer seems unnecessarily complicated.
Crypto Lending Platforms enjoy their largely unregulated space and offer their customers very attractive returns on their assets.
When Coinbase joins the party, it will definitely change the landscape as the whole crypto lending space will immediately triple or even quadruple in size within a blink of an eye. It's not a matter of if Coinbase will join, but when.
Users on these platforms have to understand the risks of those uninsured and unregistered securities clearly. These are not saving accounts insured by the FDIC that would make sure that you can access your assets in case of a default.
I accept these risks but only keep a limited amount of my assets on either one of these platforms.
If you're interested in joining BlockFi, feel free to use my referral link, so you can get up to $250 in extra bitcoin when you make your first deposit to BlockFi.
Or, if you're interested in joining Nexo, feel free to use my other referral link so we both get up to $20 worth of Bitcoin.
I always welcome constructive criticism and open discussions. Please feel free to comment or PM me about my calculations and/or sources that I use in my articles.