Crypto loans: platforms, compliance and security
3 min read
Crypto loans are one of the most interesting use cases of cryptocurrencies. In short, it is possible to use cryptocurrencies as collateral and obtain fiat money, all without having to sell the owned assets.
This use has grown over time and has in a way been revolutionized with the advent of decentralized finance platforms. DeFi protocols not only allow this type of loans, but they do not have KYC (Know Your Customer) procedures and do not require all the documents that a bank asks for.
Similar to a bank, crypto funds work as collateral, just like a real estate property would do with a traditional loan.
Crypto loans, are they legal?
Centralized platforms are expected to operate with licenses required in the countries where they operate, or in accordance with national regulations. In this case, therefore, crypto loans are legal.
Some of the best-known cryptocurrency exchanges offer crypto loans. We will mention some of them, by way of example only (and without attempting to give advice on use and/or investment).
Binance is one of them, with a program called Binance Lending. In this case, users do not actually put their cryptocurrencies as collateral to obtain the loan, but they become “creditors” themselves by lending crypto. Users deposit their cryptocurrencies and earn interest. Essentially, it is a much more convenient method of HODLing.
Instead of simply keeping funds in a wallet, they are lent out to earn interest. Here is a practical multilingual guide going into detail.
Coinbase is different, as it allows users in some US states to borrow money by putting 30% of their bitcoin as collateral, up to a maximum of $20,000. However, there is an APR interest of 8%. Each month the interest is paid and within one year the amount must be returned. The registration page provides further details.
Another famous platform is Nexo, perhaps one of the most complete in the sector. Nexo allows lending and earning interest or borrowing. With Nexo, it is possible to lend not only cryptocurrencies (it supports 17), but also dollars, pounds and euros, with an interest rate of up to 12%. It is also possible to put cryptocurrencies as collateral (it supports 18) and to obtain loans in 40 types of fiat currencies or in Tether and USDC, with a base APR of 5.9%.
Another interesting platform is BlockFi. In this case, too it is possible to borrow dollars by putting crypto as collateral, with an interest rate of 4.5%.
Alternatively, it is possible to deposit crypto and earn interest of up to 8.6%. In this case, it is very useful to have a calculator that shows how much interest will be charged. Simply enter how much money will be locked and for how long. For example, if you input 1 bitcoin for 12 months, the platform will return $7.95 in interest every week for $413 per year. Unlike Nexo, however, the supported cryptocurrencies are more limited.
The security
But are crypto loans safe? Difficult to answer with certainty. Certainly, centralized platforms offer insurance, some of which are secured against hacker attacks.
This is quite different for platforms in the world of decentralized finance. Despite the popularity of DeFi tools (which at the time of writing have locked more than 11 billion collateral in dollars), several episodes suggest that the industry suffers from attacks and scams.
The case of Harvest Finance is emblematic in this respect. Hackers have managed to seize $24 million. The result was a “leak” of more than $1 billion from TVL. Thus, it is necessary to be very careful when choosing DeFi instruments.
In any case, the most popular platform at the moment is Uniswap, which boasts of providing unlimited liquidity to thousands of users and hundreds of applications in a market accessible to all.
Conclusion
Crypto loans are ultimately one of the most interesting and dynamic cryptocurrency use cases. If on the one hand, they bring crypto loans closer to the world of classical finance, on the other, they have the merit of being able to provide liquidity even to those who might feel disadvantaged in the traditional financial world. This is no small thing.
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