You will be able to explain how crypto lending platforms that paid high yields failed in 2022.
Kelvin, a made-up 34-year-old civil servant, had a simple plan in 2021. He did not trade. He bought some bitcoin and stablecoins and deposited them with a crypto lending platform that paid him interest every week, more than any bank offered on cash. He watched the interest arrive and felt he had found a sensible middle ground between gambling on prices and leaving money idle. In the middle of 2022, the platform stopped letting him withdraw. Kelvin's story would have fitted three different firms that year. This lesson covers all three.
Ask the question from lesson 2.3, Tokens, DeFi and the questions to ask any of them: who pays the yield? On a crypto lending platform, the answer was other people, to whom your coins had been handed.
Platforms like these took in customers' crypto and then put it to work. They lent it to trading firms and other borrowers, placed it in DeFi applications, or passed it to other lenders further along the chain, and paid customers part of what they earned. When everything went well, the platform pocketed the difference between what it earned and what it paid out.
The catch is in that first step. Once your coins were lent out, they were no longer sitting with the platform waiting for you. They were with a borrower who might not repay, or locked in an application that might fail. Usually you agreed to this in the terms, often without realising it, and often the terms made you an unsecured creditor of the platform. A weekly interest payment was your reward for taking that risk, though few customers thought of it that way.
Then 2022 happened. Terra collapsed in May, as lesson 5.1, Terra and Luna: a peg held up by an algorithm, described, and prices fell across crypto. Some large borrowers could not repay. Customers grew nervous and asked for their coins back, and platforms that had lent those coins out could not return them on demand.
Celsius was one of the largest crypto lenders, based in the United States, with customers around the world. It paid yields on deposited crypto and earned them by lending and deploying customers' coins in a range of ways.
In June 2022 Celsius paused all withdrawals, and it blamed extreme market conditions. In July 2022 it filed for bankruptcy in the US. Customers found that, under its terms, the coins they had deposited into its yield accounts belonged to Celsius, and they were left as creditors in a long court process.
Hodlnaut was a crypto lender based in Singapore, which made it a closer story for many readers here. Its model was the same: customers deposited crypto and earned interest, while the firm deployed the coins elsewhere.
In August 2022 Hodlnaut suspended withdrawals and pointed to market conditions. It then applied to the Singapore court, which placed it under interim judicial management. Judicial management is a Singapore court process in which an independent manager takes control of a company in trouble, to see whether it can be rescued or its assets realised better than in a liquidation. The interim stage puts a manager in place while the court considers the application. For customers, the effect was that their coins were frozen inside a legal process they could not speed up.
Zipmex was different on the surface, because it was an exchange headquartered in Singapore rather than a pure lender. But it also offered customers a product that paid yields on their crypto, and to earn those yields it passed customer assets to outside lenders.
In July 2022 Zipmex paused withdrawals. It said it was affected by market volatility and the financial difficulties of business partners, and it disclosed exposure to lenders including Celsius, which had frozen its own withdrawals the month before. Notice how the chain ran: customers who had never heard of Celsius found their coins stuck because their exchange had sent them there.
Lay the three side by side and the same steps repeat. A firm offered a steady yield. It got that yield by lending out or deploying customers' coins. Borrowers and other platforms failed when prices fell. Withdrawals were paused, and customers became creditors in a legal process.
Compare that with the retail protections in lesson 3.2, The protections MAS requires for retail customers. MAS now bars licensed providers from lending out or staking retail customers' tokens. That rule exists because of this pattern. The same lesson made the point that tokens held on trust and kept separate should be easier to recover if a firm fails. Many customers of 2022's lenders had agreed to the opposite.
For Kelvin, the honest summary is that he had not found a middle ground. He had swapped price risk for a mix of price risk and lending risk, and been paid a few percent a year for it. A yield on crypto is not interest on a deposit, as lesson 3.3, What a licence does not protect you from, made clear when it explained that SDIC covers no crypto at all.
Go back over the three platforms with two questions for each: where did the yield come from, and what happened when customers asked for their coins back?
For each of the three platforms, write where the yield came from and what happened to customers' access to their coins.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).