Enhancing Collateralization Transparency for Lenders

Situation Overview & Background

Undercollateralized lending is a relatively new part of the crypto landscape, and therefore a novelty from the perspective of traditional finance. Many of its underlying technological concepts are designed to address flaws and gaps that have dogged traditional lenders. These can make credit transactions safer, more transparent, more efficient, and therefore cheaper for all parties.

Problem Statement

Despite these advances, the sector has seen some significant failures of risk management and basic governance. This has resulted in company and protocol failures – some very significant – resulting in financial losses for customers and investors, and lost credibility for the growing industry.

A systemic lack of

• underwriting standards,
• generally accepted good practice and ethics,
• easily accessible credit data, and
• reliable safeguards against fraudulent behaviour and misrepresentation

all threaten the field’s perceived legitimacy and viability.

While these issues are not unique to the crypto sector, traditional lenders benefit from established standards, experience, and mechanisms that minimize risk.Furthermore, regulatory guardrails mitigate risks to financial institutions, their customers, and the economies they function in, while encouraging liquidity.

Despite the benefits of regulation, its downsides are well recognized. Heavy-handed, poorly informed regulation especially when not taking into account the technology and innovation of crypto lending, slows innovation, stimies competition, and, ironically, discourages transparency, thus increasing systemic financial risk for all.

Recommendations for the Industry

It is the Crypto Credit Association’s position that voluntary adherence to standards, coupled with extreme transparency, will pre-emptively yield the benefits of regulation without the downsides of badly designed rules. The very technologies which underpin the crypto lending sector can and should be used to correctly evaluate and track both borrower and lender viability.

We recommend the establishment of a mechanism that will allow fast and easy analysis of whether a party to a transaction is overleveraged or otherwise at risk.

This will ensure transparency for all parties in a credit transaction. It would also engender confidence from regulators that the sector is actively working to learn from past failures, and help avoid regulatory overreach.

About the Crypto Credit Association

The CCA, founded in 2022, is the voice of the global crypto lending industry. Our objectives are to strengthen the global crypto credit sector by

1. defining and publishing standards
2. collecting and codifying good practice
3. establishing audit and certification mechanisms for companies in the crypto credit space
4. Informing regulatory bodies to encourage the development of consistent rules