The crypto season and the collapse of FTX have lowered the ranks of cryptocurrency lenders. Genesis, BlockFi, Voyageur Digital and Celsius Network all filed for bankruptcy in the past seven months, and the contagion is still far from over. But at least one crypto lender appears to be on the way back.
SALT Lending, one of the world’s first cryptocurrency lenders, announced on February 8 that it has closed a $64.4 million financing 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 funding. Although the Series A recapitalization effort still needs to be approved by the regulatory authorities, it should allow the company to return to full operations in the first quarter.
As reported, 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 several other crypto companies, SALT has been using Bahamas-based FTX as a source of liquidity for its lending operations.
“Crypto is facing the perfect winter storm in 2022, taking with it important industry participants like Terraform Labs, Voyager Digital, Celsius Network, Three Arrows Capital, FTX, and BlockFi. SALT is not immune to these market forces, but we are determined to emerge more stronger than ever,” said Shawn Owen, founder and interim CEO of SALT, in today’s announcement.
While SALT Lending never filed for bankruptcy, the November freeze on withdrawals depart mini storm on social media. The company also lost its California lending license, and a deal to sell the company to BnkToTheFuture was canceled.
The California license remains suspended, though Owen told Cointelegraph in an interview that he is working with state regulators to get it reinstated. “We remain as transparent as we can, and we teach all the details of how the business model works.” But Owen still cannot say at this time if and when the license will be restored. “You can’t guarantee anything because they have discretion. But we do everything we can to be good actors.
Series B funding round in 2023
SALT plans to seek further funding later in 2023 — Series B funding is anticipated to be in the $100 million range — to further build out its capital buffer, Owen told Cointelegraph.
The collapse of FTX clearly affected SALT’s business. “We have an account at FTX,” Owen said. He was shocked when the Bahamas-based exchange suddenly collapsed. “We felt it up to 48 hours before [it crashed] that FTX is another platform that has good liquidity and a good interface and is one of ours.
New: As Bitcoin nears $25K, questions about the rally’s sustainability remain
Individuals and businesses can secure fiat loans using Bitcoin (BTC) and other cryptocurrencies as collateral on the SALT platform, but sometimes borrowers want to repay the loan and return the collateral.
So lenders like SALT need to be able to prove that they “can sell collateral quickly at a certain price,” he said. “And to do that, you have to have a relationship with buyers — or you have to be a buyer.” Hence the need for more capital.
The November freeze on withdrawals and deposits “was scary for customers. As you can imagine, some have been locked out and lost money on Celsius and Blockfi. That’s why people are thinking, ‘This is the only one. Everything will go down.'”
It takes a Herculean effort to calm down, he advises. “I literally worked days, nights, weekends for 60 days solid, talking directly to people.” They have a mission “to talk to each customer personally.”
Asked about his firm’s customers, Owen said that they are mainly individuals and businesses that hold and store Bitcoin for the long term, as BTC is the main value on the SALT platform. Customers looking to monetize crypto “whether it’s to buy real estate, pay bills or what not” but they need to have confidence that they can pay off their debt and get collateral again if they want to.
Founded in 2016, SALT claims to be the first platform to launch blockchain-backed loans, although it remains a relatively small player compared to three other companies that are often compared, BlockFi, Celsius and Nexo.
But when FTX exploded, “it shocked us beyond what we were prepared for” and we “scratched our heads and just said, ‘We don’t know how bad this contagion is. We better find out exactly where this is going.'”
When it really decided to “Basically pause our services” to protect the capital, said Owen. “This is something that has never been done before. The business was never designed to be an on off switch or on and off.
More regulation needed?
Many others were shocked and appalled as well, of course, and calls were heard almost immediately for the crypto industry to be better regulated. What regulation should crypto lenders face in the coming years?
“In our opinion, the regulations are already here.” In the US lenders must be licensed on a state by state basis. The problem is not that there are no laws or rules. “It’s just not following the rules,” Retail customers are encouraged to deposit funds on platforms that are not registered banks or securities companies and in return can get “earnings”. “This is clearly illegal and we would never do it. I don’t think it would be allowed now if the public knew about it,” said Owen.
Others believe that all the crypto credit crashes have created a market vacuum, and traditional financial institutions like banks will now rush to fill the void. Owen’s view?
“I think the banks will get involved when they can, but I don’t think it’s close now.” Recent events have not recommended participation. “We’re seeing a lot of pushback. In fact, many banks now have more appetite for central bank digital currencies than crypto, he believes.
“If you would have asked me a year ago, I would have said the banks might be more interested. If you would have asked me today, I would have said at least three or four years.
Beware of counterparty risk
Were there any lessons learned last year? “The most common one is fraud. You always have to monitor the risk of your opponent because of bad actors. But there are some concrete steps you can take now.
“First and foremost, this is the principle of having collateral to cancel any loan.” So many crises in the past year were the result of unsecured debt. “Lending can be safer if you lend against an asset that is already highly secured.”
The second lesson is transparency. “I think a lot of people benefit from being told one thing and it turns out to be something else.” And the third lesson is the need for capital reserves. There is no FDIC Insurance for crypto, so it is very important to have enough capital reserves, “that’s why we want to expand the $100 million plus large Series B funding round, because to expand our model we will need significant capital. reserves, more like a bank.”
New: Crypto and psychedelics: Clarifying regulations could help industry grow
The crypto sector is not out of the woods yet, but SALT Lending’s interim CEO believes a healthier industry will emerge.
“One thing about Bitcoin and crypto is that it is ‘antifragile,’ to use the technical term.” It’s used to being attacked, and each time it emerges stronger than before. “I think there’s no question now that we’re going to come back stronger.”
Owen doesn’t know that the storm is over, “though it seems like we’ve had the worst of it. But I don’t want to disturb us.”