Crypto lending: What are crypto loans?

What is crypto lending?

Crypto lending is a way for people to use their cryptocurrency within lending or interest-bearing products, rather than just holding it in a wallet. In practice, these products are often marketed as paying interest on crypto deposits, rather than operating like traditional savings accounts.

Crypto lending can exist in both centralised and decentralised models, but they differ significantly in structure, custody and risk. In centralised models, a company typically facilitates the lending process. In decentralised models, lending activity is governed by software protocols operating on blockchain networks.

Why do people take a crypto loan?

People look into crypto loans for different reasons. This section explains some common reasons often discussed, without suggesting whether a crypto loan is right for you.

1. To preserve exposure to crypto assets

Some individuals look into crypto loans as a way to access cash or stablecoins without selling their crypto outright. By using crypto as part of a lending structure, they may be able to retain exposure to their assets while addressing short-term liquidity needs.

2. To access liquidity without traditional credit checks

Crypto lending products are often discussed in contrast to traditional loans, which typically rely on credit scores and income history. In many crypto lending structures, access to funds is based on the value of the crypto provided, rather than a borrower’s credit profile. 

3. For flexible use of loan proceeds

Depending on how a crypto loan is structured, borrowed funds may be issued in fiat currency or stablecoins. These funds are often described as having flexible use, such as covering expenses or managing short-term cash flow.

4. For portfolio flexibility

At a high level, crypto loans are sometimes discussed as one way crypto assets can be used within broader financial planning considerations. This may include managing liquidity or timing other assets’ sales. 

Important note: This information is provided for educational purposes only and doesn’t imply that crypto loans are appropriate for any particular individual.

How do crypto loans work?

Crypto loans generally rely on crypto assets being committed to a lending structure. The specific mechanics vary by model and platform.

In many models, borrowers deposit crypto assets as collateral before receiving a loan. The loan amount is typically lower than the value of the collateral to account for price volatility. Interest may accrue over time and additional fees may apply depending on the product structure.

1. Collateralised crypto loans

Regulatory analysis has shown that decentralised lending models rely heavily on crypto collateral. In simple terms, crypto assets play a central role in how these loans work.

In many cases, collateralised crypto loans require borrowers to provide crypto worth more than the amount they borrow. This approach is commonly used to account for price volatility, but it also means there is a risk of liquidation if collateral values fall.

2. Uncollateralised crypto loans

Uncollateralised crypto loans are relatively rare and are usually limited to institutional, professional or protocol-specific use cases. Instead of requiring posted collateral, these arrangements may rely on factors such as prior activity, reputation or automated risk controls.

3. Flash loans

Flash loans are a specialised form of decentralised crypto lending executed entirely within a single blockchain transaction. The loan must be borrowed and repaid within that transaction, or the transaction automatically fails. These mechanisms are generally used by advanced users and developers.

Key terms used in crypto lending

Several terms are commonly used when discussing crypto loans. Note that the definitions below are provided for general educational context.

• Loan-to-value (LTV) ratio: A measure comparing the loan amount to the value of the crypto collateral provided. Lower LTV ratios generally indicate a larger collateral buffer.
• Collateral ratio: The inverse of LTV, expressing how much collateral supports a loan relative to the borrowed amount.
• Liquidation threshold: A predefined point at which collateral may be automatically sold or transferred if its value falls below a required level.
• Margin call: A request for additional collateral triggered when the value of existing collateral declines relative to the loan.
• Stablecoins: Crypto assets designed to reference the value of another asset, such as the US dollar, and commonly used in crypto lending transactions.
• Crypto interest-bearing accounts: Products marketed as paying interest on crypto deposits.
• Decentralised finance (DeFi): Financial services built on decentralised blockchain platforms, using smart contracts rather than central intermediaries.

What are DeFi loans?

DeFi loans are loans that are issued through decentralised finance systems built on blockchain networks, rather than through traditional financial institutions or centralised companies. In lending contexts, regulatory bodies have observed that these systems rely heavily on crypto collateral.

DeFi lending typically operates through automated protocols instead of centralised intermediaries. Users interact directly with blockchain-based software using digital wallets to borrow or lend assets. 

Crypto loans vs. DeFi loans

While both fall under the broader category of crypto lending, centralised and decentralised models differ in structure and responsibility.

Crypto line of credit explained

A crypto line of credit is typically described as a revolving borrowing structure backed by crypto collateral. Borrowers may draw funds up to a defined limit, with interest generally accruing only on the amount used rather than the full available credit.

Unlike fixed-term crypto loans, lines of credit may enable repeated borrowing and repayment within the same collateral arrangement. However, terms vary significantly by provider.

Are crypto loans legal in the UK?

Crypto lending products are available in the UK, but they don’t operate in the same way as traditional banking products. Crypto loans are generally not covered by the UK’s deposit protection schemes and aren’t treated as bank deposits.

In the UK, cryptoasset activities are subject to oversight by the Financial Conduct Authority (FCA), particularly around registration, financial promotions and consumer protections. However, the regulatory framework for crypto lending continues to evolve and coverage can vary depending on how a product is structured.

Risks of crypto loans

Lack of bank-level protections

Crypto loans and related lending products don’t come with the protections typically associated with bank accounts, such as deposit insurance. 

Regulatory risk

Regulatory requirements for crypto lending products continue to evolve. Changes in regulation or enforcement actions may affect how certain products operate or whether they remain available.

Structural and market risk

Because crypto loans rely on crypto assets as collateral, they’re directly exposed to crypto market conditions. Price volatility may affect collateral values, loan terms and the risk of liquidation.

What to consider regarding crypto loans

• The regulatory landscape for crypto lending continues to evolve and changes in rules or enforcement may affect how certain products operate or remain available.
• Because crypto loans rely on crypto assets as collateral, changes in cryptocurrency prices can directly affect loan conditions, including the risk of liquidation.
• Most crypto loans are structured with predefined limits that determine how much can be borrowed and when additional collateral may be required or liquidation may occur.
• Loan terms, interest rates and repayment options vary by product and platform, which may affect how a loan fits into short-term or longer-term planning.

This list isn’t exhaustive and doesn’t constitute financial advice.

How do crypto lending platforms differ?

Crypto lending platforms can vary widely in how they are structured and how users interact with them. Differences may relate to who controls the assets, how loans are issued and how risks are managed.

1. Custody models

Some platforms hold user assets on their behalf, while others allow users to retain control of their crypto through personal wallets. This difference can affect both convenience and responsibility.

2. Operational approaches

Centralised platforms typically set loan terms, manage collateral and handle liquidations internally. Decentralised platforms rely on blockchain-based software to automate these processes, with users interacting directly through smart contracts.

3. Asset support and loan terms

Not all platforms support the same cryptocurrencies, collateral types or borrowing options. Interest structures, liquidation thresholds and user requirements may differ significantly from one platform to another.

4. Regulatory exposure and user protections 

This can differ depending on how a platform operates and where it’s based. Regulatory treatment may vary by jurisdiction and product design, and protections associated with traditional financial products generally don’t apply.

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FAQs about crypto loans

What exactly is crypto lending?

Crypto lending involves using crypto within loan or interest-earning products. Instead of holding crypto in a wallet, it’s placed into a structure that allows borrowing or earns returns, depending on the setup.

Are crypto loans legal in the UK?

Crypto loans are available in the UK, but they aren’t treated as traditional banking products. They’re generally not covered by the UK’s deposit protection schemes and the regulatory treatment can vary depending on how the product is structured.

Are crypto lending products the same as bank accounts?

No. Regulators have stated that crypto lending and interest-bearing products aren’t the same as bank accounts and don’t come with protections like deposit insurance.

What happens if the value of my collateral drops?

If the value of your collateral falls, you may be asked to add more crypto or risk partial or full liquidation, depending on the platform’s rules and loan terms.

What is DeFi in crypto lending?

In crypto lending, DeFi refers to loans issued through blockchain-based software instead of companies. Users interact directly with automated protocols using digital wallets.

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Although the term “stablecoin” is commonly used, there is no guarantee that the asset will maintain a stable value in relation to the value of the reference asset when traded on secondary markets or that the reserve of assets, if there is one, will be adequate to satisfy all redemptions.