Private Credit Rebounds In The Crypto Sector With A 55% Jump In 2023

(Bloomberg) -- More companies are tapping blockchain-based private credit as they hunt for financing in a world of elevated interest rates, sparking a partial revival in a sector that slumped amid last year’s crypto crisis.

Active private loans via digital ledgers are up 55% since the start of 2023 to about $408 million as of Nov. 28, according to RWA.xyz, a platform that tracks the debt. That’s still lower than a near $1.5 billion peak last June — and a fraction of the booming $1.6 trillion traditional market for private credit.

While borrowing costs vary deal-by-deal, some blockchain protocols charge less than 10% whereas traditional providers are seeking double-digit rates in the current environment, based on figures from RWA.xyz and private-credit lenders.

Champions of digital ledgers say they make deals and repayments transparent since blockchains are open to public scrutiny, and that software called smart contracts can monitor for stress and automatically recall loans or collateral.

“Increased transparency and liquidation mechanisms onchain have reduced the risk of lending,” said Agost Makszin, co-founder of Lendary (Asia) Capital, an alternative investment management group. “This has likely resulted in lower borrowing rates compared with traditional private credit, which is often slower and has a longer liquidation process.” 

Traditional private credit has been labeled too opaque by the likes of bond giant Pimco and the European Central Bank. The industry has tripled in size since 2015, providing loans for smaller companies, buyout financing, real estate and infrastructure. Investors are clamoring for exposure to the asset class.

In the blockchain version, protocols such as Centrifuge, Maple Finance and Goldfinch can pool or provide access to investor funds, typically using the Ethereum blockchain and stablecoins like USDC that are pegged to the dollar. Borrowers use the funds under terms codified in smart contracts.

Protocols can take steps such as structuring loans or collateralizing them with real-world assets to bolster investor confidence. RWA.xyz data shows that the consumer, auto and fintech sectors account for the bulk of active loans by value, followed by real estate, carbon projects and crypto trading.

“We’ll try and leverage the fact that we use the blockchain and smart contracts to manage our loans, take out costs and fund loans quicker, to try and get a competitive edge,” said Maple Finance’s co-founder Sidney Powell.

Turbulent History

Maple Finance was among the digital-asset outfits buffeted by last year’s $1.5 trillion crypto rout. The crash bankrupted a slew of businesses — including Sam Bankman-Fried’s FTX empire — and wiped out leveraged positions within the crypto ecosystem that were chasing too-good-to-be-true speculative yields without due care for risk.

The debacle sullied the idea of crypto lending, even if the losses stemmed from so-called decentralized lending across digital-asset projects rather than from real-world enterprises. The total value of decentralized lending has climbed 120% year-to-date to about $22 billion but remains far below the record high of $54 billion hit in April 2022, DefiLlama data show.

The digital-asset industry is recovering from last year’s turmoil but has other problems, such as uneven access to banks, which are wary of crypto’s role in illicit activity. The skepticism complicates the task of shifting between tokens and fiat currency. Traditional finance is also uncertain about digital ledgers and potential security risks since blockchains are relatively new and complex.

Another obstacle is that the crypto lending market lacks a credit rating system, unlike traditional finance, which prevents a full understanding of risks, said Tom Wan, a researcher at digital-asset fund provider 21.co.

Receivables Financing

Activity has still picked up. At the start of 2023, Maple Finance and AQRU enabled Intero Capital Solutions LLC to initially access $3 million in stablecoins from a blockchain-based credit pool. Later in the year, Goldfinch provided $1.35 million in stablecoins, its first callable loan, to fintech firm Fazz in Singapore. Callable loans allow lenders to demand principal repayment at regular intervals.

Intero specializes in receivables financing and pledged its US federal tax rebates as collateral. The deal allowed the firm to “access capital quickly and at a favorable loan rate, in an immutable, transparent and predictable transaction environment, which would not always be the case with liquidity sourced from the private credit markets,” its co-founder Tom de la Rue said.

One difference between blockchain-based private credit versus traditional non-bank lending is that the former contains more fixed-rate offerings, whereas the latter is usually variable, according to Charlie You, co-founder of RWA.xyz. Digital ledgers curb manual back-office layers that can add to costs, he added.

“Some of these cost savings are passed on to issuers,” said You. “It also enables lower principal sizes to be issued that could not be done by traditional means, particularly if the financing structure is complex.” 

Whether private credit will ever flow across blockchains in big amounts is an open question. While tokenization — creating digital representations of real-world assets — could lead to more collateral for lending, much depends on whether the crypto sector can repair its tarnished reputation.

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