The Crypto Credit Association is pleased to announce the publication of the first version of our guide to 

The guide consists of a series of high level principles that actors in the crypto credit industry should consider, whether they are lenders, borrowers, centralized platforms, or DeFi networks/DAOs.  Assembled by CCA members based on experience in both crypto and traditional financial services and credit-related good practice, the guide complements the CCA's 

manifesto for the development of crypto credit risk management principles

CCA's guidance provides financial actors in the fast-growing crypto lending space with a solid baseline for reducing their risk, and that of their customers and broader stakeholders.

Of equal importance, implementation of these practices helps forestall poorly conceived, potentially damaging regulations.  If our industry consistently demonstrates that we take responsible lending and risk management practices seriously, regulators are likely to be more open to our and our partners' inputs to pragmatic and principles-based rules.

Financial actors should do their best to be aware of and follow responsible risk management policies.  Self-regulation is always a preferable first step before the enforcement of legal mandates; we thus encourage all participants in the industry to ensure that their in-house practices are as mature and complete as possible

You can access the downloadable guide via our "Publications" page at https://www.cryptocreditassociation.org/reports, or 

A CCA Publication

Announcing the Good Practices Guide to Crypto Lending Risk Management

In the CCA's latest subject matter expert chat, we discuss ways to reduce and manage crypto investment and lending risk through evidence-based analytics.

, a Sydney-based quantitative analytics firm.  Drawing on his strong experience in credit risk management and crypto finance, Asan shares his views on how particularly risk in DeFi can be reduced through modeling techniques.  Investors and lenders can make better financial decisions when they have access to analytics services, which help them navigate the ever-accelerating paced of innovation in the crypto sector.

Audio-only versions are on Apple iTunes, Spotify, and other platforms - check out https://cryptocreditassociation.org/media to get started!

An Interview with Asan Tulemis

Quantitative Analytics and Crypto Risk

Traditional financial lending benefits from many years of accrued experience and norms that help organisations, customers, and other stakeholders reduce risks stemming from irresponsible lending practices. In recent decades, this risk management has often lagged behind accelerating innovation, leading to enhanced scrutiny by regulators attempting to limit unsustainable business techniques through tighter rules.

These include EBA Guidelines on Credit Risk Management, Basel III Principles for the Management of Credit Risk, FINRA resources on credit risk management and a wide range of national and international regulatory recommendations and binding rules. At the same time, industry-and NGO-driven voluntary good practice frameworks have grown in complexity and maturity.

Crypto lending is a relative newcomer to the financial industry, and its fastest-developing area. Through blockchain-related technologies and DeFi lending, it already incorporates significant technological controls for limiting both lender and borrower risk.

Nonetheless, many current rules and standards for traditional lending also apply to cryptofinance. Furthermore, regulators often perceive the potential for economic damage from crypto lenders who fail due to poor business practices, including insufficient credit risk management.

The Crypto Credit Association believes that self-imposed, responsible, and actionable credit risk management practices are preferable to regulation that can stifle innovation and harm smaller, newer firms. Crypto lenders and lending platform operators, whether decentralised or centralised, should incorporate both applicable existing credit risk management practices as well as crypto-specific risk management considerations into their own risk management practices. Through such practices, the industry can not only better manage its own financial risk, it can also help guide and encourage lawmakers to focus on reasonable, pragmatic regulations.

This white paper is a selection of high-level guiding principles for effective credit risk management. The list is not exhaustive, nor is it legal guidance - it is based on CCA members’ experience in both crypto lending and traditional finance, and designed to help crypto lenders and lending platform operators ensure they are on the right track.

 - you must have a financial / credit risk management framework, based on accepted standards whenever possible, and ensure that this is adhered to in practice. You should also be aware of which aspects of existing credit risk frameworks do not apply to crypto lending, and when crypto-specific controls are not available, incorporate this knowledge into your risk management practices.



You are a financial services organisation - practice credit risk management like one

 - have you defined clear responsibilities and accountability for understanding and reporting your level of permissible risk, and the risks you determine based on your credit risk management framework? Is your board and management aware of these, and have they signed off on your credit risk appetite?



Have a clearly defined risk appetite that is approved by your board and leadership, and ensure that they are made aware of risks exceeding your risk appetite

Jurisdiction and Lender Rights and Recourse

 – these are crucial to understand. Much legal (contractual and regulatory) risk can be controlled with robust lending agreements, but legal recourse is harder in some jurisdictions than others. 

Is it clear in which jurisdiction(s) you are exposed to? Is the rule of law in these jurisdictions trustworthy? Is there a Mutual Legal Assistance (MLA) treaty with your home location? Are you using a smart contract/electronic signature, or wet ink, and if the former, is a smart contract legally enforceable in the relevant jurisdiction(s)?



Understand the legal systems that you and your contracts are subject to, as well as your rights and restrictions in these jurisdictions


 – does your lending operation reliably check whom and where the money is coming from? Are you sure that this meets legal requirements in any applicable jurisdiction(s)?



You must follow all applicable laws to ensure counterparty and fund legitimacy and transparency

 – is your product appropriate for retail customers? Are you issuing securities? Whether you are using a DAO or a smart contract, if it issues securities, you must either geographically restrict its availability if legally required, or conduct appropriate checks on lenders. Performing regulatory arbitrage on-chain ultimately results in bad outcomes for participants.



Understand and comply with all market and securities laws that apply to your products and services, in all relevant jurisdictions

 – crypto entities especially are pretty complex, often offshore, and bankruptcy law in each is never straightforward. Ultimate Beneficial Owners (UBOs) are often intentionally obfuscated, and hence ultimate credit risk is hard to see.



Know who your counterparty is, and who their UBOs are


 – investigative work around liabilities and asset verification is challenging, and requires a mixture of technical tools and a lender being willing to ask the difficult questions. This is significantly eased by verifiable correctness of provided information.



Ensure financial statement consistency, veracity, and history, and that you can validate any trends in these statements


 – it is important to always be aware of the realistic value of collateral, and the role of all parties involved in its management and allocation.


Quality of collateral – is it a made-up token issued by the borrower? Duh. Is it liquid? What is its realistic liquidity in stressed times (not just right now)?

Allocation of collateral – does anyone else have a claim to this collateral? Is it likely to be clawed back by others in a bankruptcy?

Valuation of collateral – can the collateral be effectively priced at any time?

Rehypothecation – can/should you rehypothecate the collateral, and if so, does this change the above?

Third party managers – is a security agent, regulated ATS, or some other licensed, verifiably trustworthy party securing your collateral, or is it just the lender? What legal resources are available in case of negligence or malfeasance?



Always have a realistic view of the dependability of all aspects of collateral


 – have you documented your underwriting risk standards, and do you revise these at regular intervals? Can you assign clear and reproducible metrics to the risk?



Make sure you realistically and regularly evaluate loan risk based on reviewed, empirical mechanisms and standards


 – are you aware of your counterparties’ exposure to financial risk and credit liabilities? If not, is this baked into your loan risk assessment, and in line with your organisation’s risk appetite? Are you actively using any resources, such as trusted ledgers and other sources of information?



Actively use any available resources, such as trusted ledgers, that help you maintain the most complete and accurate information possible about counterparty liabilities and risk

Extending proven norms and techniques to the crypto lending space

Crypto Lending Risk Management Good Practices

Undercollateralized lending is a relatively new part of the crypto landscape, and therefore a novelty from the perspective of traditional finance. Many of its underlying technological concepts are designed to address flaws and gaps that have dogged traditional lenders. These can make credit transactions safer, more transparent, more efficient, and therefore cheaper for all parties.

Despite these advances, the sector has seen some significant failures of risk management and basic governance. This has resulted in company and protocol failures – some very significant – resulting in financial losses for customers and investors, and lost credibility for the growing industry.

generally accepted good practice and ethics,

reliable safeguards against fraudulent behaviour and misrepresentation

all threaten the field's perceived legitimacy and viability.

While these issues are not unique to the crypto sector, traditional lenders benefit from established standards, experience, and mechanisms that minimize risk.Furthermore, regulatory guardrails mitigate risks to financial institutions, their customers, and the economies they function in, while encouraging liquidity.

Despite the benefits of regulation, its downsides are well recognized. Heavy-handed, poorly informed regulation especially when not taking into account the technology and innovation of crypto lending, slows innovation, stimies competition, and, ironically, discourages transparency, thus increasing systemic financial risk for all.

It is the Crypto Credit Association's position that voluntary adherence to standards, coupled with extreme transparency, will pre-emptively yield the benefits of regulation without the downsides of badly designed rules. The very technologies which underpin the crypto lending sector can and should be used to correctly evaluate and track both borrower and lender viability.

We recommend the establishment of a mechanism that will allow fast and easy analysis of whether a party to a transaction is overleveraged or otherwise at risk.

This will ensure transparency for all parties in a credit transaction. It would also engender confidence from regulators that the sector is actively working to learn from past failures, and help avoid regulatory overreach.

The CCA, founded in 2022, is the voice of the global crypto lending industry. Our objectives are to strengthen the global crypto credit sector by

establishing audit and certification mechanisms for companies in the crypto credit space

Informing regulatory bodies to encourage the development of consistent rules

Call to Action - Risk Management Through Transparency in the Crypto Lending Space

We were happy to welcome Dean Tappen, Executive Director of the 

USTETA CLIC (Crypto Logic and Integrity Committee)

 for our latest video conversation around risk management and regulatory topics.

In this video, we focus on the US regulatory environment, particularly the present state of regulation, which agencies are responsible for ensuring the stability of crypto finance, and current challenges surrounding the development of rules and structures. 

Dean and I talk about how many of the failures (and failings) recently experienced across various crypto firms are nothing new in the financial sector. We discuss how rather than being tech- and innovation driven, crypto actors must understand that they are financial services firms and act accordingly, and the need to differentiate between crypto technology and crypto companies - with DeFi and related innovations having trust built in rather than relying on existent, mature regulation and unreliable norms in traditional finance. 

About CLIC: "CLIC endeavors to position the United States at the forefront of innovation and development in cryptocurrency while protecting the assets of individuals."

With Dean Tappen, Executive Director of CLIC

The US Crypto Regulatory Environment

On June 5 2023, the US Securities and Exchange Commission 

, including for “[...]operating unregistered exchanges, broker-dealers, and clearing agencies; misrepresenting trading controls and oversight on the Binance.US platform; and the unregistered offer and sale of securities.”

 and a number of other crypto exchanges, and following numerous strong comments about crypto assets and the basis for regulating them by SEC Commissioner Gary Gensler, the Binance case illustrates a growing trend of overreach by United States regulators in the crypto space. The net result of this overreach has been to introduce confusion and insecurity into a vibrant and growing industry, to dramatically stifle innovation without providing notable protections for customers, to measurably hurt consumers’ ability to access financial services, and to significantly disadvantage the United States as an attractive location for crypto innovators.

The Crypto Credit Association (CCA) maintains that sensible, consistent, and clear principles-based regulation is the best way to protect consumers and financial services sector stability. We understand that the crypto sector collectively has some way to go in developing and adopting industry-wide good practices such as financial risk management. This is why the CCA, together with our members, are actively developing and publishing credit risk management principles, recommendations, and tools for the crypto lending industry.

It is our position that the SEC’s aggressive posture towards crypto actors is a politically motivated way to save face, after being asleep at the wheel in the run-up to FTX, Celsius, BlockFi, and other abject failures. It risks discrediting and undermining the very real need for regulatory enforcement against bad actors in the industry, whether malicious or negligent, who have done significant financial and reputational damage.

Regulation should have the maximum total utility for all stakeholders in a market as its goal. This means protecting customers, economic stability, innovation, and the ability to do business in a fair market. With this in mind, regulators should acknowledge that customers clearly want to participate in the crypto ecosystem. Shutting off or excessively complicating legitimate existing means of doing this, as opposed to providing guidance and clarity, will only drive customers to alternative, high-risk, and entirely unregulated “back alleys”. As a result, rules must be clearly stated, actionable, and consistently enforced. While not perfect, the 

European Union’s Markets in Crypto Assets (MiCA) directive

 is widely regarded as a step in the right direction in this regard.

The SEC’s lawsuit against Binance, despite the company’s actions to comply with US law and its efforts to transparently meet regulatory requirements, risks driving US-based crypto firms to relocate to jurisdictions with regulation that is clear, practicable, and coherent. Furthermore, attempts to apply US law outside the jurisdiction of US regulators will increasingly result in fewer firms being willing to do business in the country, with a loss of competitiveness by American industry and a loss of choice for US customers.

The CCA encourages US-based crypto actors to work with organizations such as the 

 to constructively inform US financial services legislation and regulatory enforcement. We hope that the US Congress understands the need for, and benefits of, clear rules and good practice guidance for all financial services actors, rather than arbitrary and excessive punitive enforcement of unclear rules, such as those relating to crypto assets as equity, or crypto risk management.

In light of the SEC's charges against Binance, it's clear that the future of the crypto industry in the United States hangs in the balance. The current regulatory environment, marked by perceived overreach and ambiguity, threatens to stifle innovation and drive crypto businesses away.

Many jurisdictions are moving in the right direction of working with industry to develop and deploy clear, actionable, principles-based regulation, and supporting common and responsible practices for the industry. Worryingly, the SEC’s heavy-handed enforcement of already-inconsistent US regulation risks driving similar, arbitrary actions elsewhere. Not least, the current approach of regulators seems intent on ensuring incumbent players maintain viability and dominance in the future of financial infrastructure. This degradation of accessibility and innovation is detrimental.

It's time for a change. Crypto has huge potential to positively influence the global financial sector to the benefit of those whom it serves. To fulfill this potential, the industry needs a balanced, clear, and principles-based regulatory framework that protects consumers, ensures stability, and fuels innovation.

The CCA believes that access to the benefits of crypto innovation, and the ability to participate in this growing part of the economy, should be accessible to all. The CCA is leading the charge, but we can't do it alone. Every crypto entity that is based or active in the US must step up and play an active role in shaping the legislation and regulatory practices that will define our industry. The future of crypto and its benefit to customers and society, is in our hands. It's time to take action - consider joining the CCA today, and help us drive positive change.

The SEC Tightens the Screws

Binance:  Death by a Thousand Cuts 

This article was originally published on medium.com.

“The institutions are coming” is a crypto meme that never fails to go away. And while institutions are adopting over a longer time horizon than the popular narrative would like, they are coming — slowly, methodically. A key barrier to institutional adoption is the institutions themselves, their processes and business models that make them good at their existing business do not prepare them well for DeFi protocols.1

Separately, the ardent idealism of promoting only fully autonomous protocols is unrealistic in the complex world of bridging off-chain recourse with on-chain operations. DeFi builders and protocols will have to embrace asset managers, structurers, and servicers of off-chain processes as customers, to drive the next era of on-chain use cases. To date, protocol builders have thoughtfully focused efforts on autonomous use cases like P2P borrowing/lending and exchange, but businesses need economic incentives to drive future infrastructure adoption and the pool of crypto-native high net worth individuals is quite small. Further, few consumers have the time to learn and analyze risk as we painfully witnessed by the dramatic collapses of Terra, the crypto-banks, and countless ponzi-nomic scams.

It’s no wonder crypto critics view much of DeFi as a problem in search of a solution. Apart from automated market makers (AMMs) providing real-time liquidity for tail assets and lending protocols matching borrowers with lenders, there have been few real-world use cases that have grown out of DeFi Capital Markets. Still, having extensively used the underlying technology, proving out a 100% on-chain business model, and taking time to reflect, we at Cicada are more convinced than ever in the radical improvements in efficiency, transparency, and access that on-chain tools can provide both consumers and users of lending products.

In part one of this series, we dig into the efficiency gains passed on to end lenders that are driving us to build a 100% on-chain Risk-as-a-Service business promoting the use of smart contracts and self-custodial solutions. In later parts, we will cover the nuanced improvements of greater transparency in lending and the benefits of greater accessibility.

Efficiency Drives Cost Savings to End Investors

In stark contrast to the 100% trust-based financial markets, DeFi replaces most trust assumptions with smart contracts. Code and smart contracts can assume the role of custodian, escrow agent, clearinghouse, fund administrator, auditor, and fund compliance. If two parties want to exchange assets, decentralized exchanges leverage smart contracts and remove the need for a central clearinghouse. This significantly decreases counterparty risk and makes financial transactions more efficient. No more T+30 to settle an institutional loan trade. Lower trust requirements should have the eventual benefit of reducing regulatory pressures and the need for third-party services like fund administration and audits. Unfortunately, given the actions of various bad actors and limited risk management across crypto lending, trust requirements are certain to increase in the near term (see our 

 for more insights into the needed changes). Still, radical efficiency gains are possible for nearly every area of the middle- and back-office within buy- and sell-side firms.

As depicted in the chart below on the asset management value chain, it’s easier to bucket financial firm cost structures into front-, middle-, and back-office functions. Capital markets on public blockchains remove most back- and a large part of middle-office functions. We estimate these efficiency gains have saved well over 50% of the costs to manage a traditional loan book. In fact, recent cost-to-income ratios for large-scale asset managers are now north of 60%2. With fee pressure exerting multi-decade top-line pressure, asset manager consolidation has been a big focus over the past decade.

But let’s be honest, a 50–70% cost reduction underlying an extremely sticky recurring-fee business is no catalyst for immediate change, particularly when many back- and middle-office functions are shared, and fixed costs spread across a larger legacy business. This is where better tooling for the front-office, as well as added transparency for lenders, drives down the long-term cost of capital, brings more borrowers on-chain, and the flywheel to scale real world non-crypto native lending begins to turn. Operating cost reductions are evolutionary, front-office tools to reduce risk and drive down the cost of capital are revolutionary.

In fact, we’ve seen this evolution play out in crypto-native markets already. The below chart benchmarks investor fees on a platform like Maple Finance vs. other traditional financial products. While the asset classes are unique, you can see the massive disconnect between credit funds, particularly on the private side, and private lending on chain. Unfortunately, investors won’t benefit from these savings until DeFi participants can build a flywheel to attract borrowers and asset managers alike.

Our long-term vision at Cicada is to build a leading credit risk service that operates at a fraction of the cost/income ratios of traditional asset managers by leveraging scalable self-custodial infrastructure. Over time, as DeFi rates harmonize with traditional interest rate markets, and stablecoin usage grows, our ability to launch new products at lower costs to lenders should support non-crypto native adoption of crypto lending tools and payment rails.

DeFi is Much More Than Autonomous Protocols, Part 1: Driving Efficiency in Lending Markets!

The crypto credit crisis that loosely began with the collapse of Terra Luna in May, extended to the downfall of Alameda-FTX, and, arguably, remains to this day, should have taught market participants a number of important lessons. Viewed from the lens of first principles, the problems were not new or native to crypto, but the consequence of a nascent ecosystem with poorly implemented operational controls and risk management. Favorably, many of the solutions we believe to be fundamental to sustainable credit creation can leverage crypto building blocks in a more efficient and fair allocation of risk and reward.

Certainly, crypto lending has come a long way in recent years, from bespoke OTC lending and highly capital inefficient over-collateralized loans, but there are several areas that need to radically improve to build a more solid foundation for the next cycle and beyond. Moreover, the hypocrisy of most crypto lending not using crypto-native technologies like self-custody and smart contracts, is palpable. But there is a way forward…

The bull market proved we were not all here for the tech, but lets really use it!

DeFi Protocols enable a far more transparent user experience while improving the auditability of crypto liabilities. One of the constant battles our team had with crypto-native borrowers was identifying what centralized lenders were lending funds. We took serious issues with any company wanting to borrow capital but not willing to disclosure their counterparties and a detailed capitalization table. This must stop. The daisy chaining of risks only to find out, after the fact, that fraud was repeatedly committed could not happen with on-chain lending. Transparency reduces risk to lenders and drives down long term borrowing costs.

, were early in their implementation phase during the prior cycle. We are big fans of the platform and view the quantitative asset and liability checks into any crypto-native borrower as a vital tool. However, accessing, using, and enforcing Credora integrations on borrowers are all equally important processes for a lending business that some lenders missed or struggled to implement. Creating industry standards for lenders are vital areas of improvement. We plan to more actively enforce borrower integration of such tools, while shortening loan tenors to facilitate more immediate recourse should borrower activities on the platform become incongruous with the underlying strategy.

Tracking tools to aid in monitoring wallet, exchange, and protocol transfers will become more important tools to reduce risk across the crypto-native lending space over the next few years. Tools like Elliptic and Nansen can help to track fund flows, detect misrepresentations/fraud, and monitor wallet activity. We are excited to integrate a rules-based flagging system by integrating off-chain financial information with on-chain fund flow data.

Moreover, smart contracts facilitate a trust-minimized approach to institutional lending. Lenders use self-custodial wallets to deposit funds into a smart contract, with a risk manager (”pool delegate”) operating a pre-defined mandate to lend funds to a borrower’s account. Trusting the risk management of a pool delegate is still needed, but importantly, the pool delegate never takes ownership of the pooled funds, removing the ability to ever 

Most CeFi (centralized finance) business models were doomed from the start. Take centralized models like BlockFi and Celsius as examples. These centralized businesses started out providing yield to customers by transforming bitcoin through the black box of a central institution into a yielding asset via 

. After generating outsized customer growth on the back of BTC-yield products, the businesses were stuck in constant search of yield to drive customer growth, which then drove more lending growth, which in turn grew revenues. Consequently, these businesses began more as proprietary trading desks, with formal credit risk controls an afterthought. As the GBTC trade moved from premium to discount, these CeFi lending trading desks 

moved out the risk curve in search of yield

. Had CeFi yield derived transparently on chain, with visible counterparties and transaction terms, fewer unassuming investors would be queuing in outstanding 

Sustainable lending models must start with better incentive structures from first principles, to better align interests of various stakeholders. An on-chain USDC lending pool has a defined risk mandate, separate from a BTC lending pool or another dedicated USDC mandate. Risks are isolated at the pool level, with customer funds deposited via self-custodial wallets.

The socialization of individual losses at a centralized firm level is problematic as well. While various DeFi pools were less than perfect in the fair allocation of loss, smart contracts are important tools to more efficiently tranche debt and liquidation in the event of loss. In stark contrast, CeFi institutions enabled reckless lending to 

 but in opaque wrappers. Lenders were made to believe they were earning yield via over-collateralized lending, but losses on reckless lending were ultimately socialized across all lending verticals. If DeFi investors aren’t comfortable with the borrower or collateral or tenor or rate of a DeFi pool, lenders are free to withdrawal and reallocate. Importantly, a poor investment in one pool will not bleed into the solvency of another pool, which ultimately reduces risk to a lender creating a diversified strategy across a number of lending pools.

Risk Frameworks for Crypto-Native Lending Need to Radically Change

Responsible lending takes hard work. Crypto’s open, global, 24/7-traded marketplace adds unique complexity to crypto-native lending. Business due diligence takes time, rigor, and expertise. Unfortunately, many short-cuts were taken in the provisioning of credit. One such short cut repeatedly used was collateral.

Allow us to tangent into an illustrative example: Say a “sophisticated” institution is allowed to (a) borrow $100 USDC with $50 worth of bitcoin, buy $100 of bitcoin with the proceeds, (b) pledge $100 worth of bitcoin to get $200 USDC from another lender, and © proceed to swap for $200 more of bitcoin. What kind of system-wide restrictions on credit are lenders promoting? None. Such aggressive lenders justified such actions, inadvertently promoting reckless lending by constructing businesses that profit on collateral liquidation cascades. Even worse, these strategies were even promoted with illiquid, off-chain collateral like GBTC. In the above example, we took $50 of bitcoin and turned it into $300 USDC in debt and $350 in bitcoin assets. In this simplified example, the bitcoin is split across three different venues, with two lenders having recourse to 50% of their loan values worth in bitcoin, but with the majority of the assets ($200 in bitcoin) outside the recourse of lenders. Moreover, lenders had to trust borrowers to self-report their debt with other lender.

While the above is a highly stylized example, it happened, and it quickly demonstrates the need for unsecured credit risk frameworks to be integrated with collateral models as the use of funds borrowed is an extremely important driver to the creditworthiness of the borrower. No amount of collateral below 100% will change this. In fact, many of the largest and riskiest borrowers that are now in bankruptcy borrowed via collateralized deals. Collateral should not supersede good business practices, particularly collateral prone to bouts of illiquidity induced volatility.

Moreover, collateral models even above 100% collateralization need more human judgement and context, unfortunately. The multiple examples of lending to illiquid, reflexive, and or fundamentally mis-priced asset valuations highlights how collateral models need to be reworked. Critically, these issues weren’t specific to CeFi, with overcollateralized DeFi protocols like 

 subjected to inappropriate risks as a result of poor asset selections for their automated lending pools.

So long as most crypto assets are risky, venture-like investments, with market pricing resulting from asset prices manipulated over short durations, market pricing as an indicator of asset valuation is not a sustainable approach. A more comprehensive and rigorous approach to collateral valuation is necessary to ensure the health and stability of the lending space.

In short, some lenders issued loans without proper underwriting given the view that pledged collateral made up for the risks. In contrast, lending businesses that performed proper operational due diligence and leveraged on-chain tools into a formal credit underwriting process would have identified bad actors early, resulting in materially lower default rates and preventing the systematic daisy-chaining of leverage.

Zooming out, crypto lending now has the potential to grow in a much more sustainable manner following the removal of many reckless market participants and business models. But without improvements in the key areas identified above, crypto-native lending is likely to repeat the prior cycle’s errors. People will be people, and cycles will come and go, but we are optimistic that the actual use of blockchain-native technology, well-designed incentive structures, and a focus on risk management will radically improve the lending experience for all stakeholders and bring more private credit onto transparent public blockchains.

The Hypocrisy of (most) Crypto Lending and Why On-Chain Lending is the Path Forward

If the crypto lending industry does not proactively and aggressive align on, and implement, strong financial risk management good practices, regulators will force these upon us, to the entire industry's detriment.

The past year saw the spectacular collapse of a number of crypto platforms, including 

, and others, including several crypto lending entities. Whilst more than one failure can to some degree be traced to the fall of FTX, the blame for most of the sector’s troubles falls squarely on a lack of strong, responsible financial and operational risk management.

Coming hot on the heels of the instability of 2021-22’s speculative fluctuations, these fiascos have caused significant reputational damage to crypto as a growing and promising segment of the global financial ecosystem.

The Crypto Credit Association (CCA) maintains that cryptocurrency, the use of blockchain, and smart contracts are vital tools in the evolution of financial services towards a more consumer-, business-, and society-friendly activity. We believe that these capabilities provide great value for democracy, transparency, and efficiency.

The overall state of the industry is still immature. The CCA understands that even “traditional finance” is not immune to the effects of greed, irresponsibility, and outright fraud, despite significant regulatory oversight.

However, there is a widespread sentiment that the recent collapse of 

 was in no small part driven by the relaxation of US custody requirements, which 

. Furthermore, even though SVB complied with existing regulations, it did not practice sufficient financial risk management, such as interest rate hedging, or even 

having a Chief Risk Officer over a period of several months.

This strengthens the narrative, whether correct or not, that the financial industry demands light-touch regulation, while being unwilling to implement voluntary measures to protect its stakeholders.

SVB, FTX, and other recently failed firms had significantly different business models, and sources of financial risk – whether due to liquidity, collateral management, or other factors. More important is what they share:

All were significant players in their respective areas of activity

Poor or inexistent financial risk management

Insufficient regulatory requirements for contingency planning

It remains to be seen what the knock-on effects of SVB’s demise are on global banking and lending. We predict increasing calls for regulators to take a much firmer hand in ensuring financial stability. This will include the crypto sector, to its likely detriment. Regulators will not care whether an entity is a bank, a pure crypto lender, or a hybrid – they will demand compliance with fundamental rules to analyse, track, and mitigate financial risk, across the board.

In the crypto industry, we have already seen forebodings of this in the 

, Chair of the US Securities and Exchange Commission over the past months, the rise in CBDCs, and the proposed EU 

It is the CCA’s position that responsible, consistent, and proactive industry self-regulation is necessary to forestall regulatory overreach. This can crush innovation and ultimately hurt consumers. Such overreach, by frequently under-informed and overenthusiastic regulatory and legislative bodies, is inevitable if the crypto lending sector and its participants do not act pre-emptively. Unless we agree on and implement clear codes of conduct, including ethical rules, transparency requirements / mechanisms, and risk management standards, the developed world’s regulators will do this for us.

We thus call for all participants in the crypto lending space to join forces to

Develop and align on a good practices framework for crypto lending

Create an industry-led responsible practices certification mechanism for crypto lenders

Collectively inform and work with regulators to educate and inform them of the crypto industry’s good faith in order to mitigate the impact of potentially highly onerous rules

The CCA, founded in 2022, is the voice of the global crypto lending industry.Our objectives are to strengthen the global crypto credit sector by

Risk Management, Regulation, and Crypto Lenders

 announced recently that it is ceasing operations and transferring its clients' assets to 

 specifically refers to the complexity of crypto-related regulation, the costs of complying with regulatory requirements, and the uneven international playing field due to inconsistent levels of regulation, as major factors affecting LiteBit's viability.

Although LiteBit is not a crypto lender, offering only on-chain staking, crypto lending platforms face the same challenges. While specific national regulatory systems are more permissive and light-touch than others, many jurisdictions impose onerous compliance burdens on all financial firms. Often, these are exacerbated by a lack of understanding of crypto finance and its underlying technologies, combined with losses to customers from numerous irresponsible, or outright fraudulent, crypto actors.

Markets in Crypto Assets (MiCA) directive

, while widely considered to be a reasonable and well designed regulatory package, is open to interpretation by EU member states; the nature of EU Directives is that their interpretation in national law may vary significantly across the EU, as long as its basic requirements and limitations are met. Other states have far more onerous and inconsistent rules.

Regulation is not punitive by design. It aims to protect consumers and other participants and stakeholders in financial markets, by improving stability through rules. Unfortunately, lawmakers and regulators are often under-informed about rapidly developing technologies such as crypto. They are also susceptible to creating heavy-handed, excessive rules as a result of real or even perceived abuses or failures by market actors (we in no way imply that either of these were the case with LiteBit). Such excessive rules can quash innovation and stifle competition, not least by excluding smaller and new industry participants who cannot afford the costs of complying with rules that may not apply to them at all.

The Crypto Credit Association's position is that the primary way to constructively inform new regulation, and to help forestall unnecessarily burdensome rules that will contribute to more company failures, is for all crypto lending providers, platforms, and networks to clearly and publicly adopt and implement proper credit risk management, financial governance, and security practices. This includes traditional finance-oriented standards such as those issued by the 

, as well as evolving crypto-specific credit risk good practices.

The CCA is a not-for-profit industry association representing the crypto lending sector. We provide guidance on good practice for lenders and borrowers, support education of regulators, and coordinate industry action to ensure the crypto lending sector is appropriately represented and not unduly disadvantaged by compliance rules.

A Case for Sensible Crypto Regulation

LiteBit the Dust

We were privileged to welcome David Weisberger, co-founder and CEO of CoinRoutes. CoinRoutes is a prominent and leading algorithmic trading company across CeFi and DeFi. 

In this two-part video conversation, Dave shares his views on a topics related to risk management, stability, and regulation in the crypto lending space. He also discusses his four considerations for regulation - protection of client assets, robust and mandatory risk disclosure, fair and equitable markets, and items pertaining to "fiduciariness" of intermediaries.

How did excessive risk taking and lack of transparency lead to crypto failures among lenders? What are some of the similarities between bad lending and risk management in traditional banking and crypto, and why is it unreasonable to single out crypto for irresponsible practices? 

How can crypto technology help create stability through trust, transparency, and traceability, and how can it open up the kinds of closed financial systems that are a major factor in traditional bank collapses such as SVB?

How do these principles affect all of financial services? What is the role of risk in crypto lending and other crypto related services? What are the respective limits and roles of technology and regulation in creating trust in underlying crypto market infrastructures? What are Dave's predictions for future practices and regulations?

All our interviews are also available in audio-only format on 

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