The baseline in risk management
At its core, there are three key questions to ask when identifying a responsible digital asset lender:
1. How is the lender generating yield on my assets?
Some lenders will be tempted to take risks to try to earn more money and drive profitability. But generating large yields often comes at the cost of taking outsized risk of losing invested assets. If the market for US dollar stablecoin is 8-10% and someone else is paying 20%, investors must question how they can do that. When yields appear too good to be true, they usually are.
2. What is the lender’s approach to credit risk management?
Recently, many digital asset lenders failed because they didn't properly assess the risk of specific borrowers. To underwrite risk means to question all information being provided to you so you have a complete understanding of the borrower’s business model, what assets on their balance sheet are truly liquid & are being properly valued, and what they are using the borrowed assets for.
Lenders must avoid taking existential risk to any one counterparty. In the recent past, this was clearly not the case for many lenders who are now bankrupt.
3. Can I access my assets quickly?
Above all, seek out comfort about the return of the assets, not just the promised return on those assets. Clients can be assured a lender is engaged in responsible risk management if the assets can be pulled back from that institution whenever they are needed.
Taking risk management to the next level
At Ledn, we take pride in how our risk management policies have performed. However, there are two key ways in which we are strengthening our approach to lead this industry forward:
- Becoming even more selective of our institutional borrowers.
Ledn has further refined its select list of borrowers to focus on those who have well diversified revenue streams from both digital and traditional assets. Doing so can reduce counterparty risk as any losses on the borrowers’ crypto trading can be backstopped by their traditional assets.
- Adding over-collateralized lending to our institutional lending business.
For all other sectors, we will lend only on a collateralized basis. Even though the collateral reduces our risk, we will maintain our robust credit underwriting of each individual borrower. This combined credit-underwriting/collateralization approach reduces the possibility of loan losses in the event that unforeseen circumstances arise.
At Ledn, we are in a privileged position to lead and reshape the digital asset lending industry moving forward. Our approach to risk management is just one example of how we’re doing it.
John Glover is the Chief Investment Officer of Ledn Inc. John brings decades of traditional finance experience to his role, where he manages Ledn Capital and its associated risk management strategy and protocols. Ledn clients will soon be able to participate in regular webinars with John. Top open a Ledn account, please visit ledn.io
This post is commissioned by Ledn and does not serve as a testimonial or endorsement by The Block. This post is for informational purposes only and should not be relied upon as a basis for investment, tax, legal or other advice. You should conduct your own research and consult independent counsel and advisors on the matters discussed within this post. Past performance of any asset is not indicative of future results. Read Ledn’s disclaimers at https://www.ledn.io/legal/disclaimers.
© 2023 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.