Coinbase’s USDC Rate Reveals Focus on Crypto Credit Risk

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The lower than market interest rate on USDC stablecoin deposits could reveal confidence in its own strength, a bet that customers will view the cryptocurrency platform as a safe place to keep their money. silver.

When the largest US cryptocurrency exchange launched 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 average. national savings account.

Coinbase hasn’t gone out of its way to point out that other crypto lending platforms offer depositors rates that are around 8% higher. Crypto lender Celsius, for example, is currently announcing an annualized percentage return (APY) on USDC deposits of 8.88%.

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

While high interest rates are attractive, they can present different levels of risk, the representative added. 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 a comment 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 it can get away with paying a lower interest rate on deposits because it is a large and well-known player in the cryptocurrency industry with a publicly traded stock, which means it has to publicly disclose financial statements and a wealth of information about its risks.

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, Chief 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 crypto native financial services firm that powers the 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 said of CoinDesk TVs “First Mover”.

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

The Compound Treasury business recently launched by Compound Labs offers an APY of around 4% on US dollar deposits, which are then converted to USDC and invested in Compound’s decentralized lending protocol. The Compound Treasury website states that the accounts are offered by “Compound Prime LLC”, which according to regulatory documents is a company incorporated in Delaware. The accounts are offered in part by digital asset company Fireblocks Inc. and Fireblocks LLC, a money services company, according to the website.

A competitive market

Relatively low coin interest rates could be opportune in terms of market dynamics: Some cryptocurrency lenders have recently reduced their deposit rates, in part because the market has cooled since the start of the decade. ‘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 loan demand is not large, said Cynthia Wu, business development and sales manager at Hong Kong-based Matrixport. With a bitcoin price range around $ 30,000, there isn’t 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. ‘a hacking of funds, or due to the default of an unsecured counterparty, or due to management users may lose a substantial part of their funds, because these types of institutions are not regulated 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 did not want to be identified due to the sensitivity of the matter, said Prime Trusts ‘risk management team was concerned about Celsius’ strategy of endlessly remortgageing assets. .

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

Under the Celsius Terms of Service, the company also owns assets for customers 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 avoid losses, according to the terms.

In early 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, say their higher rates are justified by the way they handle the deposits. 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 Coinbases’ entry into USDC’s yield-producing products would eventually push substandard 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 Voyagers, via a representative. Voyager only lends assets to highly controlled, regulatory compliant, and well-capitalized financial institutions, each with a trusted base of counterparties.

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