Recent changes in the cryptocurrency markets and regulatory pressures from the SEC are challenging exchanges. Decreased trading volumes and declining revenues have led exchanges to turn to ‘lending’ practices.
In recent years, major exchanges such as Coinbase, Bitstamp, and Bitget have introduced credit products to revitalize trading volumes and diversify their revenue sources. According to Bloomberg analysts, this strategy could lead to the emergence of new risks in the wake of the recent major crisis in the crypto market.
Using Leverage Carries Risks
While the margin loans and lending programs offered by exchanges present various opportunities to investors, they also bring the potential risks of using leverage in the crypto sector. Issues in 2022, such as the collapse of FTX, Silvergate Capital, Signature Bank, and Silicon Valley Bank, caused a significant downturn in the industry. To prevent such a collapse from occurring again, executives express that they are developing new strategies.
Professor Hilary Allen from the American University Washington College of Law points out that these new initiatives by crypto exchanges create leverage. Allen states that this situation could increase fragility in the crypto market.
The Lending Trend Pushes Exchanges to Compete
The recent lending trend in crypto exchanges is intensifying competition among them. Particularly, the significant decline in trading volumes has directed exchanges towards different strategies. Coinbase’s trading volumes have dropped to their lowest levels since its IPO in 2021. Binance felt this decline even more sharply.
Lending is Limited and Collateralized
The challenges faced by credit institutions in 2022 prompted exchanges to reconsider their strategies. Specifically, exchanges are focusing on lending in a limited and collateralized manner. At the same time, it’s observed that some exchanges are collaborating with third-party credit providers to minimize risks.
It’s evident that this new lending strategy will attract the attention of regulators. There are indications that the U.S. Securities and Exchange Commission (SEC) might introduce stricter oversight for crypto exchanges.