SYLLABUS SECTION: GS III (ECONOMY)
WHY IN THE NEWS?
Recently, a major U.S. cryptocurrency lending company Celsius Network froze withdrawals and transfers, citing “extreme” market conditions, sparking a sell-off across crypto markets.
WHAT IS CRYPTO LENDING?
- Celsius is a crypto lender, which essentially means it is a bank of the crypto world.
- Crypto lender allows customers to deposit their coins with them for interest, and then lend out cryptocurrencies to earn a return.
Crypto lenders make money by lending – also for a fee, typically between 5%-10%.
WHO ARE THE BIGGEST PLAYERS?
- New Jersey-based Celsius, New York-based Genesis, U.S. lender BlockFi and London-based Nexo.
- Present status:
- Crypto lending has boomed over the past two years, along with as decentralized finance, or “Defi,” platforms.
- DeFi and crypto lending both tout a vision of financial services where lenders and borrowers bypass the traditional financial firms that act as gatekeepers for loans or other products.
BENEFITS:
- Savings at traditional banks offer paltry returns due to historically low-interest rates, crypto lenders offer much higher returns – at the very top end as much as 20%, though rates depend on the tokens being deposited.
Risks:
- Crypto lenders aren’t overseen by financial regulators.
- Crypto lenders also face other risks, from volatility in crypto markets than can hit the value of savings to tech failures and hacks.
- It is throwing up risks for investors as it evolves to mirror traditional markets.
- Patchy reliability and problems operating at scale.
- Lack of disclosure of products and systems.
Read more: UPSC CURRENT AFFAIRS
SOURCE: INDIAN EXPRESS