In the ever-evolving world of cryptocurrency, the landscape of bitcoin-backed lending is once again capturing the attention of financial advisors and investors alike. The resurgence of this market, particularly within both decentralized (DeFi) and centralized financial systems (CeFi), raises important questions about the future of crypto lending. In today’s “Crypto for Advisors” newsletter, Gregory Mall, chief investment officer at Lionsoul Global, sheds light on the dynamics at play, while Lynn Nguyen, CEO of Saros, discusses the burgeoning realm of tokenized stocks.
The Historical Context of Crypto Lending
Lending and borrowing have been integral to financial markets for centuries, and the crypto space is no exception. The practice of collateralized lending traces back to medieval Europe with Lombard lending, where merchants extended credit secured by movable goods and securities. In the digital realm, this model quickly adapted, with crypto assets like Bitcoin offering a unique liquidity profile. Bitcoin can be sold 24/7 in deep markets, making it an attractive form of collateral.
Bitcoin lending’s appeal is further underscored by its potential to generate liquidity without triggering taxable events, a feature particularly attractive in jurisdictions with favorable tax laws. Additionally, Bitcoin maximalists, who are deeply committed to their holdings, prefer borrowing against their assets rather than selling them, anticipating future appreciation.
The Rise and Fall of CeFi Lending
The evolution of bitcoin-backed lending began informally as early as 2013. However, it wasn’t until the ICO boom of 2016-2017 that institutional-style players such as Genesis and BlockFi emerged. Despite the challenges of the 2018 crypto winter, the centralized finance market expanded, attracting retail-focused firms like Celsius and Nexo.
The subsequent rise of DeFi in 2020-2021 fueled further growth in lending. CeFi and DeFi platforms competed aggressively, but this competition led to diminished balance sheet quality. Some CeFi lenders relied heavily on their governance tokens and relaxed underwriting standards, resulting in asset-liability mismatches and under-collateralized loans.
The fragility of this system became apparent in the second quarter of 2022 when the collapses of TerraUSD (UST) and Three Arrows Capital (3AC) triggered a wave of losses. Prominent CeFi lenders like Celsius, Voyager, and BlockFi faced bankruptcy, wiping out billions in customer assets. Regulatory investigations revealed familiar failings: inadequate collateral, poor risk management, and opaque inter-firm exposures.
A New Era for CeFi and DeFi
Following these events, the CeFi lending market has undergone a significant reset. Surviving lenders have strengthened risk management, enforced stricter collateral requirements, and tightened rehypothecation and inter-firm exposure policies. Despite these efforts, the sector remains a fraction of its former size, with loan volumes at roughly 40% of their 2021 peak.
In contrast, DeFi credit markets have staged a robust comeback. On-chain transparency regarding rehypothecation, loan-to-value ratios, and credit terms has helped restore confidence, pushing total value locked (TVL) back toward record levels.
The CeFi vs. DeFi Debate
Crypto has long been driven by a commitment to on-chain transparency and decentralization. However, CeFi isn’t going away anytime soon. The space has become more concentrated, with firms like Galaxy, FalconX, and Ledn dominating the market. Many institutional borrowers continue to prefer dealing with licensed, established financial counterparts due to concerns about anti-money laundering (AML), Know Your Customer (KYC) requirements, and regulatory risks.
As a result, CeFi lending is expected to grow, albeit at a slower pace than DeFi. The two markets are likely to evolve in parallel, with DeFi offering transparency and composability while CeFi provides regulatory clarity and institutional comfort.
Tokenized Stocks: A New Frontier
In the “Ask an Expert” segment, Lynn Nguyen, CEO of Saros, discusses the integration of tokenized securities into traditional financial systems. Nasdaq’s proposal to trade tokenized securities promises to bring distribution, efficiency, and transparency to everyday investors. The global tokenized asset market is projected to reach $30 billion this year, up from $6 billion in 2022, creating new opportunities for small investors.
However, there are challenges to overcome. Technical hurdles and regulatory clarity are essential to ensure a smooth integration of blockchain infrastructure with legacy systems. Security concerns, particularly in light of rising cyberattacks, must also be addressed.
Nasdaq’s proposal aims to offer tokenized stocks with the same material rights and privileges as traditional securities, ensuring investors aren’t shortchanged. This approach seeks to provide investors with voting rights, dividends, and equity stakes, enhancing the appeal of tokenized assets.
As the cryptocurrency landscape continues to evolve, the resurgence of bitcoin-backed lending and the rise of tokenized stocks present intriguing opportunities and challenges for financial advisors and investors. With both CeFi and DeFi poised for growth, the future of crypto lending is set to be a dynamic and transformative journey.
Steve Gregory is a lawyer in the United States who specializes in licensing for cryptocurrency companies and products. Steve began his career as an attorney in 2015 but made the switch to working in cryptocurrency full time shortly after joining the original team at Gemini Trust Company, an early cryptocurrency exchange based in New York City. Steve then joined CEX.io and was able to launch their regulated US-based cryptocurrency. Steve then went on to become the CEO at currency.com when he ran for four years and was able to lead currency.com to being fully acquired in 2025.
