On November 10, 2021, the total global value of all cryptocurrencies skyrocketed to a massive US$2.95 trillion, surpassing its previous all-time high of US$835 billion recorded back in January 2018. From that point onward, the market continued to fluctuate between US$1.5 trillion and US$2 trillion.
These dramatic changes reveal three key truths: the cryptocurrency market has seen incredible growth, it is still highly volatile, and digital assets have now become a major and long-term asset class worldwide.
Since many people now hold crypto as long-term assets rather than using them strictly as digital money, this opens a great opportunity for individuals and businesses to borrow money using cryptocurrency as collateral.
This means someone who owns Bitcoin or Ethereum but needs cash can get a loan without selling their crypto — they simply use it as security for the loan.
Note: The term crypto lending can also refer to situations where someone lends cryptocurrency to another person and earns interest, similar to investment products. That type of lending is not the focus here and should be handled with caution, as such products may be regulated as securities. For example, a crypto services company was recently penalized US$100 million and forced to register its lending products with the US SEC.
What Is Crypto Lending Today?
In a typical secured loan, the lender gives the borrower money and takes a security interest in some property or asset owned by the borrower. This collateral allows the lender to seize that asset if the borrower fails to repay the loan.
In crypto-backed lending, the borrower offers their cryptocurrency as collateral. Unlike traditional assets like bank shares or equipment, cryptocurrencies are decentralized and managed through blockchain technology.
Today, most crypto loans are run through lending platforms that use smart contracts — automated, self-executing programs on the blockchain. These smart contracts manage everything from interest and payments to the locking, release, or liquidation of collateral.
There are several types of crypto lending setups:
- Peer-to-Peer (P2P): The platform matches individual lenders and borrowers.
- Peer-to-Contract (P2C): Borrowers interact with a pool of lenders inside the platform.
- Direct Lending: The platform itself lends money directly to borrowers.
These platforms let borrowers get cash without having to sell their crypto assets. Lenders benefit from an automated, transparent system that lowers the risk in case the borrower fails to pay.
Even traditional institutions like banks and investment funds are starting to show interest as more start-ups and corporations hold or earn cryptocurrency.
Key Legal Considerations for Lenders
1. Regulatory Compliance
In most provinces across Canada (except Quebec), laws like the Personal Property Security Act (PPSA) and the Securities Transfer Act govern how security interests are created and enforced.
Although these laws don’t specifically mention cryptocurrency, lenders must still follow them properly to ensure their security interests are valid.
Lenders must also keep in mind tax obligations, currency transfer limits, and money regulations related to cryptocurrency and normal currency, as these can affect how a loan is structured or repaid.
2. Protecting Against Market Volatility
Crypto prices are known to rise and fall dramatically. If the value of the crypto collateral falls too much, the lender’s security could become insufficient. To manage this, lenders should design systems that require borrowers to provide extra collateral or make repayments if the value drops below a certain level.
Some lenders may also require over-collateralization — meaning the borrower must give more crypto than the value of the loan — to reduce risk from the start.
The level of protection chosen usually depends on whether the loan is a regular term loan or a revolving credit facility.
3. Control and Due Diligence
Lenders must decide how much control they want over the crypto collateral during the loan. For example, will the crypto be stored in a wallet controlled by the lender, placed with a custodian or trustee, or left with the borrower under certain conditions?
If lenders use a trustee or custodian, they can gain more control and may even earn returns on the crypto assets while holding them.
Due diligence is very important. Before giving a loan, the lender must confirm who owns the cryptocurrency, check all wallets involved, and ensure everything is properly disclosed and recorded. They should also verify how the borrower plans to use the cryptocurrency during the loan period.
4. Repayment Terms
Loan agreements must clearly state how and when the borrower will repay both the principal and interest.
Repayments can be in fiat (normal currency) or crypto, and can be weekly, monthly, annually, fixed, or variable. Some platforms allow automatic deductions, while others require manual payment.
Security Interests, Protection, and Enforcement
Taking Security in Cryptocurrency
To properly secure a crypto-backed loan, the lender must take a first-priority security interest in the cryptocurrency. This gives them the highest chance of recovery. The security interest must:
- Attach to the collateral via a contract.
- Be perfected either through possession, control, or a registered notice.
Control can be established in several ways:
- Taking physical custody, such as a cold wallet (USB drive) handed over to the lender.
- Placing the crypto into a wallet the lender controls.
- Transferring the crypto to a trusted third party (like a custodian or trustee).
Some lenders choose to avoid taking control and simply register a notice of security interest, but this carries higher risk.
Digital Risks and Collateral Protection
Cryptocurrency can be stolen, hacked, or lost due to misplaced private keys. Blockchains can also undergo changes such as forks, token swaps, or rollbacks.
Lenders and borrowers must agree on technical and contractual protections to ensure the collateral remains safe and continues to qualify legally as collateral.
Enforcement Challenges
Enforcing security over crypto is complicated because blockchain transactions are fast, irreversible, and sometimes hard to trace. If a borrower secretly moves the crypto away, it may be impossible to recover.
For this reason, strong contractual enforcement clauses—and smart contract features that automatically transfer collateral upon default—are the safest mechanisms for lenders.
Final Thoughts
Taking security in cryptocurrency raises similar issues as taking security in other digital assets like NFTs or stablecoins, and the laws are still developing in these areas.
Due to the high levels of volatility, legal uncertainty, and technical risks, anyone considering offering or using crypto-backed loans should speak to a lawyer who has expertise in crypto finance and secured lending.
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