Captain’s note
- The SEC suggests asking how a custodian uses your crypto, including whether it uses deposits as collateral for its own lending.
- The SEC warns that a proof of reserves is not as rigorous as a financial statement audit and may not provide any level of assurance.
- The FTC says the FDIC does not insure crypto assets at all, and charged Voyager with falsely claiming customer funds were FDIC insured.
Lenders compete on the headline rate, so that is what borrowers compare. The 2022 bankruptcies suggest a different order: first find out whether you will get your collateral back, then what happens if the price falls, and only then what it costs. This checklist does not name a best lender. It lists the questions regulators say to ask, and why each one matters.
1. Who holds the collateral?
Ask where your bitcoin sits during the loan: in the company’s own wallets, with a third-party custodian, or in a smart contract. The SEC’s bulletin on crypto custody suggests asking how a custodian uses your crypto, noting that some use deposited assets as collateral for their own purposes, which it calls rehypothecation, and that some commingle customers’ assets instead of holding them separately. Get the answer in the loan agreement, not in a chat window. More in Custody and Rehypothecation: What Happens to Your Collateral.
2. What are the liquidation rules?
- The liquidation threshold for your collateral, as a loan-to-value percentage.
- The penalty charged on liquidation.
- Whether you get a warning, how, and at what level.
- Whether you can add collateral automatically, and what happens if the platform is down.
- Whether a fixed-term loan is liquidated for missing its maturity date.
Coinbase, for example, publishes an 86% threshold for bitcoin, a 4.38% penalty, an email at the start of its Danger band, an optional top-up feature, and a backup site for adding collateral. A lender that will not state its rules this clearly is telling you something. See Loan-to-Value and Margin Calls: The Ratio That Decides Your Loan.
3. Every fee, in writing
List the interest rate and whether it is fixed or variable, origination or processing fees and whether they are added to the principal, platform fees inside the rate, network fees, early repayment terms and the liquidation penalty. The SEC’s custody bulletin adds the fees to move assets outside a custodian and to close an account; a withdrawal fee is part of the cost of getting your collateral back.
4. Registration and where it operates
Check what the company is and who supervises it. FinCEN guidance says exchangers and administrators of convertible virtual currency generally qualify as money transmitters under the Bank Secrecy Act. The SEC charged BlockFi in 2022 with failing to register its retail crypto lending product, and the CFTC urges the public to verify a firm’s registration before committing funds. Availability also varies by state: Coinbase, for instance, excludes New York from its crypto-backed loans.
5. Insurance claims
Be skeptical of any suggestion that your crypto is insured like a bank deposit. The FTC says Voyager advertised that customers’ dollars were FDIC insured, while the FDIC does not insure crypto assets at all and Voyager’s customers’ cash was protected only if its partner bank failed. The FTC also says Celsius claimed a $750 million insurance policy for deposits that it did not have. If a lender mentions insurance, ask what exactly is covered, by whom, and against what.
6. Proof of reserves
Some platforms publish a proof of reserves to show they hold enough assets for customers. The SEC warns investors to exercise extreme caution when relying on it: a proof of reserves is not as rigorous as a financial statement audit, may not provide any level of assurance, and may not protect against the entity moving customer assets shortly afterward.
7. How do you get out?
- How repayment works and how quickly collateral is returned.
- What happens to your collateral if the company fails or pauses withdrawals.
- Whether moving to another state ends access, as Coinbase notes can happen.
- How to complain, and to whom.
8. Read the risk disclosure
The SEC’s bulletin on crypto interest-bearing accounts tells investors to carefully review the documents and disclosures to be fully aware of the risks to their deposited assets. The same applies to a loan. Coinbase, for example, shows a risk disclosure on the loan preview screen before you confirm and lists price volatility, protocol security, protocol liquidity and wallet issues among the risks. A lender that lists no risks has not removed them.
| Question | Good sign | Warning sign |
|---|---|---|
| Collateral | Held separately or in a published smart contract; not lent out | Vague terms, or the right to use your coins |
| Returns | No yield promised on the collateral | High yields paid on deposits, funded by lending |
| Safety claims | Specific risk disclosures | ‘Safer than a bank’, insurance claims |
| Rules | Threshold, penalty and fees published | Terms shown only after you deposit |
Tip: Search the company’s name with words like complaint, scam or lawsuit before you deposit, as the FTC suggests for any crypto company. Then search the regulators’ press release pages too.
Lenders that promised the most safety in 2022 were often the ones regulators later charged; read Lessons From Crypto Lender Bankruptcies: Celsius, Voyager and BlockFi before trusting a marketing claim, and Crypto Loan Scams to Avoid: Fake Lenders, Advance Fees and Promised Yields for the outright frauds.