Lending

The crypto lender froze withdrawals in mid-November. It will resume operations in Q1 2023, buoyed by a Series A recapitalization.

The crypto winter and FTX collapse have decimated the ranks of cryptocurrency lenders. Genesis, BlockFi, Voyager Digital and Celsius Network all filed for bankruptcy in the past seven months, and the contagion may still not be over. But at least one crypto lender appears to be on the comeback trail.

Salt Lending, one of the world’s first cryptocurrency lenders, announced on Feb. 8 that it had closed a $64.4 million financing round that will strengthen its balance sheet and replenish its capital reserves. Accredited investors will receive shares of the company’s preferred stock in return for their funding. Though the Series A recapitalization effort is still subject to approval by regulatory authorities, it should allow the company to return to full operation in the first quarter.

As reported, the Denver-based Salt Lending announced a “pause” — i.e., a freeze — on withdrawals and deposits to its lending platform in mid-November, shortly after the FTX crash. Like some other crypto firms, Salt had used the Bahamas-based FTX as a source of liquidity for its lending operations. 

“Crypto faced a perfect winter storm in 2022, taking with it significant industry participants like Terraform Labs, Voyager Digital, Celsius Network, Three Arrows Capital, FTX, and BlockFi. Salt was not immune to these market forces, but we are determined to emerge stronger than ever,” Shawn Owen, founder and interim CEO of Salt, said in an announcement on Feb. 8.

While Salt Lending never filed for bankruptcy, its November freeze on withdrawals set off a mini tempest on social media. The firm also lost its California lending license, and a deal to sell the company to Bnk To The Future was jettisoned. 

The California license remains suspended, though Owen told Cointelegraph in an interview that Salt is working with the state’s regulators to get it restored. “We’re staying as transparent as we can, and we’re educating them on all the details of exactly how the business model works.” But Owen still can’t say at this point if and when the license will be restored. “You can’t guarantee anything because they do have discretion. But we’re doing everything we can to be good actors.”

interview that Salt is working with the state’s regulators to get it restored. “We’re staying as transparent as we can, and we’re educating them on all the details of exactly how the business model works.” But Owen still can’t say at this point if and when the license will be restored. “You can’t guarantee anything because they do have discretion. But we’re doing everything we can to be good actors.”

A Series B funding round in 2023

Salt plans to seek further funding later in 2023 — an anticipated Series B financing in the $100 million size range — to further build out its capital buffer, Owen told Cointelegraph.

FTX’s collapse clearly impacted Salt’s business. “We had accounts on FTX,” said Owen. He was stunned when the Bahamas-based exchange suddenly collapsed. “We felt up until 48 hours before [it crashed] that FTX was another platform that had good liquidity and a good interface and was one of ours.”

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Individuals and businesses can secure fiat loans using Bitcoin (BTC) and other cryptocurrencies as collateral on SALT’s platform, but sometimes borrowers want to pay off their loans and recover their collateral.

Thus, a lender like Salt has to be able to prove that it “can sell collateral pretty much instantaneously at a certain price,” Owen further explained. “And in order to do that, you have to have relationships with buyers — or you have to be the buyer.” Hence the need for further capital.

The November freeze on withdrawals and deposits, Owen said, “was terrifying for our customers. As you’d imagine, some of them had already been locked up and lost money in both Celsius and BlockFi. So they were thinking, ‘This is just another one. Everything’s going down.’”

It took a Herculean effort to calm things down, he suggested: “I’ve literally been working days, nights, weekends for 60-plus days solid, speaking to people directly.” He had a mission “to speak to every one of our customers in person.”

Asked about the firm’s customers, Owen said they were primarily individuals and businesses holding and saving Bitcoin for the long term, as BTC is the predominant value on Salt’s platform. Customers are looking to monetize their crypto “whether it’s for buying real estate, paying bills or whatnot” but they need to have confidence that they can pay off the loan and get their collateral back if they so desire.

Founded in 2016, Salt claims to be the first platform to launch collateralized blockchain-backed loans, though it remains a relatively small player compared with three other firms with which it is often compared: BlockFi, Celsius and Nexo.

But when FTX imploded, Owen said, “it shocked us beyond what we were prepared for” and so “[we] ducked our heads and just said, ‘We don’t know how bad this contagion is. We’d better figure out exactly where this goes.’”

That’s when the firm decided to “basically pause our service” to protect capital, Owen said. “That was something we’d never done before. The business was never planned to be an on-off switch or to be turned on and off.”

More regulation needed?

A lot of other people were surprised and shocked too, of course, and calls were heard almost immediately for the crypto industry to be better regulated. Is regulation something that crypto lenders are just going to have to live with in the coming years?

“In our opinion, the regulation is already here,” Owen said. In the U.S., lenders are required to be licensed on a state-by-state basis. The problem wasn’t an absence of laws or rules. “It was simply that they were not following rules,” according to Owen. Retail customers were encouraged to deposit funds on platforms that were neither banks nor registered securities firms and, in return, were able to earn outsize “yields.” “That clearly was illegal, and we never did that. I don’t think that that will ever be allowed now that the public is well-informed,” Owen said. 

Others believe that all the crypto lending bankruptcies have created a market vacuum, and traditional financial institutions like banks will now rush in to fill the void. Owen’s view?

“I do think that banks will get involved when they can, but I don’t think we’re close to that right now,” he said. Recent events have discouraged their participation. “We’re seeing a lot of pullback.” In fact, many banks today have more appetite for central bank digital currencies than they do for crypto, he believes.

“If you had asked me a year ago, I would have said that banks were probably getting a lot more interested. If you’re asking me today, I would say they’re probably at least three or four years out.”

Beware of counterparty risk

Have any lessons been learned in the past year? “The overarching one is fraud. You have to always watch out for counterparty risk because there are bad actors,” Owen said. But there are some concrete steps that can be taken right now.

“First and foremost, it’s the principle of having collateral to back any kind of loan.” So many of the meltdowns of the past year were the result of unsecured lending, according to Owen. “Lending can be much safer if you’re lending against an asset that’s overcollateralized.”

A second lesson is transparency, he said. “I think a lot of people feel very taken advantage of because they were told one thing and it turned out to be something else.” And a third lesson, he continued, is the need for capital reserves. There’s no FDIC Insurance for crypto, so having sufficient capital reserves is especially important, “which is why we want to ramp up for a large Series B $100 million-plus funding round, because to expand our model, we’re going to require significant capital reserves, much more like a bank.”

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The crypto sector isn’t out of the woods yet, but Salt Lending’s interim CEO believes a healthier industry is going to emerge eventually. 

“One thing about Bitcoin and crypto is that it’s ‘antifragile,’ to use a technical term,” he said. It’s used to coming under attack, and each time it emerges more robust than the time before. “I think, right now, it’s no question we’ll come back a lot stronger.”

Owen doesn’t know if the storm is over yet, “though it feels like we’re through the worst of it. But I don’t want to jinx us.”