Are Stablecoin Loans Safe?
Five steps the best stablecoin and crypto lenders take to protect their users.
Stablecoin loans are an important part of the money services that crypto lending platforms offer. Because of this, most crypto lending platforms give their users many ways to borrow stablecoins.
Investors can earn excellent interest rates on stablecoin deposits, just like with other types of crypto lending. The interest rate on these digital assets can reach 80% APY.
There are also a variety of platforms that offer stablecoin loans at reasonable interest rates. Due to their low volatility, stablecoins are the best digital assets for giving out loans.
Despite the popularity of stablecoin loans, numerous crypto investors have expressed concerns about them. These concerns have led many to wonder if stablecoin loans are safe.
This article will provide an answer to that question. For a start, we will discuss some risks involved with stablecoin loans. Additionally, we will discuss five steps the best stablecoin and crypto lenders take to protect their users.
Common Risks Associated With Stablecoin Loans
There are several risks associated with all types of crypto loans. This section highlights some of these risks.
Insolvency Of A Crypto Lender
This is a significant risk attached to all crypto platforms in this space. Even with all the protections, you might not be able to get your collateral back if a crypto lender or a third-party custodian goes bankrupt.
Limited Insurance Coverage
Most crypto lenders offer some kind of insurance for the assets that are on their platform. But unlike a regular bank account, which covers everything, insurance policies for crypto platforms only cover some things.
In most cases, the insurance policies will cover losses from technical glitches or mistakes by your crypto lender or their custodial partner. There is usually no insurance coverage for hacks or thefts. Whenever hacks occur, your digital assets may not be fully protected.
Unexpected Changes To Government Regulations
The crypto lending industry is still in its nascent phase. As a result, most governments have yet to devise appropriate regulations for lending platforms.
But in a few rare cases, crypto lending has been stopped right away because of government rules. For instance, a popular exchange, Crypto.com, had to halt its lending service in March 2022.
Taking this step ensured compliance with the new lending regulations in Europe. Loans that were given out in the past had to be paid back within seven days, or the borrower risked losing their collateral.
Are Stablecoin loans Safe?
The answer to the above question depends on the lending platform you select for your stablecoin loans.
When crypto investors and traders choose trustworthy lending platforms, they can be sure that their stablecoin and crypto loans will be safe and secure. But it might not be in your best interest to get a stablecoin loan from a site that isn't reliable.
Even though they say they are the best in the business, some crypto lending platforms are not regulated by government agencies.
There is still no consensus among government agencies about how to regulate crypto. But it is very important that you choose a crypto lending platform with a good reputation that is licensed and regulated by a well-known traditional financial regulator. Cryptocurrency lenders must also have a good track record of giving out loans that are safe and secure.
Even though cryptocurrency lenders don't offer the same level of protection as a traditional bank or online loan company, the best lending platforms in this space still offer private insurance that covers certain risks.
Even though the cryptocurrency markets are very volatile, these platforms make sure to reduce the risks that come with lending cryptocurrency.
Choosing the right crypto lending platform is, without a doubt, one of the most important things you can do to get safe and secure stablecoin loans. To choose the best platform for you, you need to know about the risks and security measures that the best stablecoin lenders have in place.
Crypto Lending Platforms' Safeguards To Protect Stablecoin Borrowers
How do the best crypto lenders protect stablecoin and crypto borrowers on their platforms? This section will discuss five popular safeguards adopted by the best stablecoin lenders.
Professional Custodial Services
The crypto collateral that borrowers put up as security is kept safe by the best lenders, who work with trustworthy third-party custodians. We must state that the type of custodial services on offer vary depending on the platform you choose for your stablecoin loans.
Even though different platforms offer different custodial services, many will store your cryptocurrency collateral in an offline wallet. Also, custodial service providers usually cover crypto assets stored in their cold wallets with insurance.
Some of the best lending platforms sometimes give their users more than one access key. These keys allow users to access their accounts directly, even if their lender goes bankrupt.
The Federal Deposit Insurance Corporation does not provide insurance coverage for crypto assets. As a replacement, the best crypto lenders use third-party custodians with private insurance policies.
This insurance cover helps to protect borrowers' collateral from a security breach or theft. It is not uncommon for third-party custodians to offer direct insurance coverage for assets held in their cold wallets. However, borrowers sometimes have the option to buy asset insurance coverage. Although, this option is not available in all cases.
Even though these policies provide some form of protection, they do not cover all potential losses. For example, cryptocollateral lost because of hacks or phishing scams is not covered by third-party insurance. Also, if a crypto lender goes out of business, you might not be able to get your collateral back.
Overcollateralization is another safeguard deployed by the best crypto lenders. In general, the loan-to-value (LTV) ratio for all crypto loans, including stablecoin loans, must be 50% or less.
In simpler terms, borrowers must provide double their crypto loan amount as collateral. In some cases, lenders require up to a 70% loan-to-value ratio. However, when this occurs, borrowers must pay higher interest rates.
Even though the value of the crypto assets used as collateral is high, overcollateralized loans protect both the lender and the borrower from drops in the value of the crypto assets.
Crypto lenders will ask you to provide more collateral if the value of yours drops. Alternatively, crypto collateral may be liquidated to raise LTV to a suitable level.
Along with overcollateralization, margin calls are another safety measure that crypto lenders use. The margin call process involves issuing notifications to borrowers when their collateral drops below a certain level.
Borrowers will have to pay off their loans right away or put up more collateral when the loan margin call comes. Depositing more collateral helps increase the loan-to-value ratio of the loans and prevent liquidation.
As an illustration, suppose you obtain a crypto loan with a 50% LTV ratio, and then your LTV later hits 65% due to market volatility, a loan margin call will be sent to update you on the situation.
At that point, your lender may demand an instant loan repayment before your LTV hits 75% or 80%. You could also be asked to put up more collateral to keep the value of your loan stable. Where there is a failure to meet any of these conditions, most lenders will liquidate your collateral to generate income and pay off your loan.
All centralized finance crypto platforms include KYC (know your customer) protocols in their registration process. These crypto platforms adopt verification processes similar to those required for opening bank accounts.
Despite their similarities, the verification process on each crypto lending platform may vary. The goal of this process is to prevent money-laundering activities through crypto lending.
In general, crypto lending platforms ask new users for the following information before they can use some of their services:
Information about your name and birth date
Phone number and email address
Scan or photo of your government-issued ID
A utility bill with your name and address
Due to their low volatility, stablecoins are the best digital assets for giving out loans. But like any other type of crypto loan, stablecoin lending comes with risks.
Most crypto lending platforms are aware of these risks. So, they have taken a number of steps to make sure that loans made through their platforms are safe and secure.
If you want to secure a stablecoin loan or any other crypto loan, ensure you opt for the best crypto lending platforms.