Credit risk

Only 4%? Coinbase’s USDC Rate Reveals Focus on Crypto Credit Risk


Coinbase’s below-market interest rate on stablecoin deposits USDC could reveal confidence in its own strength – a bet customers will view the cryptocurrency platform as a safe place to keep their money.

When the largest US cryptocurrency exchange rolled out the new deposit service last week for the dollar-linked USDC stablecoin, at a rate of 4%, it touted the ability to pay customers “more than 50 times the price. national average of a traditional savings account “.

Coinbase hasn’t gone out of its way to point out that other crypto lending platforms offer depositors higher rates – in the order of 8%. The crypto lender Celsius, for example, is currently announcing an annualized percentage return (APY) on USDC Deposits by 8.88%.

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When asked about the below-market deposit rate, Coinbase highlighted the dangers of lending money to platforms that might be riskier: “We have recently seen the rise of crypto interest accounts that offer rates attractive on customer assets, ”said a representative from Coinbase. in an email response to questions sent by CoinDesk.

“Although high interest rates are attractive, they can present different levels of risk,” added the representative. “When you read the full terms and conditions, you may find that your assets are on loan to unidentified third parties and subject to their credit risk, which could result in a complete loss of your crypto holdings.”

Such commentary highlights an increasingly relevant question as more cryptocurrency companies attempt to lure large institutional investors and businesses into digital asset markets with promises of high returns: What is the creditworthiness of the lender accepting the deposits, and will it be able to repay them when the depositors request redemption?

To deposit is to lend

Just as large companies typically pay lower interest rates on bonds than a small, low-quality issuer, Coinbase might bet that it can get away with paying a lower interest rate on deposits because it’s a big and well-known player in the cryptocurrency industry, with a stock listed on the stock exchange, which means it has to publicly disclose financial statements and a wealth of information about its risks.

Related: Oppenheimer more bullish on Coinbase

“We don’t know the exact legal structure of Coinbase, but 4% might not be a bad rate to enter debt markets if it falls into the camp of unsecured corporate liability,” David Grider , head of digital asset strategist at Fundstrat, wrote in his weekly newsletter on June 30. “But many users will rightly view Coinbase as a very creditworthy borrower and find the option of ‘lending’ to them attractive.”

Circle, the native crypto financial services company that powers USDC stablecoin, also offers an APY of around 4% on its USDC Circle Yield product.

Circle Yield is “an institutional grade product,” Jeremy Allaire, CEO of Circle, recently told CoinDesk TV’s “First Mover”.

“The USDC that is on loan is oversized on our platform, which is very important,” he said.

The Compound Treasury activity recently launched by Compound Labs offers an APY of about 4% on deposits of US dollars, which are then converted to USDC and invested in Compound’s decentralized lending protocol. The compound treasure website says the accounts are offered by Compound Prime LLC, which according to regulatory filings is a company incorporated in Delaware. The accounts are offered in part by the digital assets company Firewall inc. and Fireblocks LLC, a money services company, according to the website.

A competitive market

Coinbase’s relatively low interest rate could be opportune in terms of market dynamics: Some cryptocurrency lenders recently reduced their deposit rates, in part because the market has cooled since the start of the year. .

BlockFi, Ledn and Matrixport cut interest rates on USDDC deposits for July amid changing market conditions, while rates for major decentralized finance (DeFi) protocols such as dYdX, Aave and yearn .finance are already as low as 0.47%.

BlockFi’s new interest rates for USDC deposits in July are between 5% and 7.5% depending on the size of the deposits. Ledn and Matrixport are between 6.5% and 9.5%.

“The demand for borrowing is not great,” said Cynthia Wu, business development and sales manager at Hong Kong-based Matrixport. With the price of bitcoin “limited to approximately $ 30,000, there is not much to do.

The fear of depositing tokens on a lending platform is that the business might get into trouble. The accounts are not covered by Federal Deposit Insurance Corp. insurance, as is the case with savings deposits with a US bank.

What could possibly go wrong?

As Grider wrote, the risks are many: “If the assets of lenders are somehow impaired in a sale in which the liquidated collateral does not cover the loans issued, or in the event of a sale. from a hack of funds, or due to the failure of an unsecured counterparty, or due to mismanagement – users can lose a substantial portion of their funds, as these types of institutions are unregulated like banks. ”

CoinDesk reported in June that cryptocurrency custodian Prime Trust had broken its contract with Celsius, citing “red flags. “A person familiar with the situation, who declined to be identified due to the sensitivity of the matter, said Prime Trust’s risk management team was concerned with Celsius’ strategy of” remortgage assets.”

A spokesperson for Celsius told CoinDesk that the company “never remortgage” the crypto assets of New York residents.

Under Celsius’ Terms of use, the company also owns assets for clients in Texas and Washington State. Celsius “may lend, sell, pledge, mortgage, assign, invest, use, mix or otherwise dispose of eligible digital assets and assets with counterparties or hold eligible digital assets with counterparties, and we will use our best commercial efforts and operational to prevent losses ”, according to the terms.

At the beginning of June, Celsius announced that it had invested more than $ 200 million in mining equipment and other investments.

Yield generation and sustainability

Other crypto lenders, still offering relatively higher APYs for their USDC deposits such as Nexo and Voyager Digital – with APYs of 12% and 9%, respectively – claim their higher rates are justified by the way they manage. depositors’ funds.

“There are, of course, times when we have a little more money earning interest,” said Antoni Trenchev, co-founder and managing partner of Nexo, in an email response via a representative. “In these situations, we engage in market neutral trading strategies to generate returns. “

Trenchev predicted that Coinbase’s entry into USDC’s yield-producing products would eventually push “less good” platforms out of the market.

“This process is already becoming evident,” Trentchev said. “Unsustainable services are slowly losing their appeal. ”

“At Voyager, we perform proper due diligence and risk mitigation analysis before lending assets,” said Steve Ehrlich, CEO and co-founder of Voyager, via a representative. “Voyager only lends assets to highly supervised financial institutions that are compliant with regulations and well capitalized, each with a trusted base of counterparties.”

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