Beware Of These Crypto Lending Risks

By June 1, 2021 No Comments

There are lots of benefits to crypto lending, which is why it is so appealing in the eyes of financial actors. With bank lending, you will be involved in bureaucracies and extensive verification processes.

These processes may include credit score, which is a procedure that consumes so much time to develop. With crypto lending, things can move at a much faster pace as there is no requirement of a credit check in order to gain access to the loan.

On top of this, a crypto loan is more accessible than a conventional bank loan that establishes the interest rates and amount, as well as the loan period.

While crypto lending is usually compared to traditional savings or interest accounts, and it is beneficial in different ways, it is not without risks. Because these are newer platforms, they are riskier than highly regulated traditional banks.

It is vital to keep these risks in mind for you to be prepared and to understand why some still have reservations about this new form of lending.

Liquidity & Value

People who borrow usually take on the inherent risk of supplying liquidity should their collateral value drop below the required value. Borrowers need to do this to ensure that lenders are always whole. What this means is that borrowers need to closely monitor their collateral ratio to make sure that it remains within a safe range.

At the moment, liquidation systems have proven themselves to be quite robust, and lenders have yet to lose their investment. Although, this continuing success is not set in stone, therefore, should be watched meticulously.

Furthermore, in the case of decentralized choices, sometimes there is an issue of low liquidity. These can radically shift rates if a large amount of capital moves in or out of the system. Speaking in general, the creation of interest rate functions is out of a need to incentivize a moderately stable equilibrium, but volatility does happen.

Taxation & Regulation in Crypto Lending

A major use case of borrowing is directly related to evading a taxable event. For the most part, many jurisdictions have unclear guidance on the nature of most of these assets, including stablecoins. As a consequence, it becomes hard for an individual to properly understand the tax implications of their crypto lending activities. A common recommendation for users would be to speak with a tax consultant.

Moreover, a majority of the decentralized platforms operate without KYC disclosures and without a license. This means that their regulatory future is not certain.

Technology in Crypto Lending

There exists a technological risk when it comes to smart contracts in the decentralized space. Computer code in the form of smart contracts controls capital flow inside the system, hence theoretically, a hacker could attack the platform via an exploit or glitch.

If you liked our “Beware Of These Crypto Lending Risks” and found some valuable information, check this space regularly to get more updates on crypto-backed loans and cryptocurrency.