{"text":[[{"start":7.6,"text":"A new way of lending digital tokens is channelling billions of dollars’ worth of coins into a risky corner of the crypto market and attracting the attention of US and European regulators, who believe it may require closer supervision."}],[{"start":21.268,"text":"More than $10bn has been deposited into so-called crypto vaults, up from $4bn at the start of last year, according to data group Blockworks, as digital asset owners try to earn juicy returns on the stablecoins they hold by lending them out to traders."}],[{"start":36.285,"text":"Like other forms of decentralised finance (DeFi) lending, vaults operate on decentralised platforms using smart contracts, rather than through intermediaries. However, each vault has a so-called “curator” who acts like a fund manager by choosing an investment strategy, setting risk parameters and taking fees. The strategy is typically to lend or stake tokens for a return of somewhere between 3 and 10 per cent, higher than other DeFi lending, while some riskier strategies can offer as much as 20 per cent or more."}],[{"start":66.16,"text":"However, some in the industry are concerned that, after high-profile collapses of lenders Voyager Digital, Celsius and Genesis in 2022 owing to risky loans and heavy customer withdrawals, the rise of lending vaults is attracting money to one of the riskier, unregulated parts of the crypto market, where investors do not have a market intermediary to protect them and can be automatically liquidated."}],[{"start":89.266,"text":"“It’s very risky,” said Léopold Wenger, digital assets director at research firm Kaiko. “One of the biggest paradoxes is everything is public because everything is encoded in the smart contract, [but] none of the investors read or understand the ratios, the liquidity rates, they just have a look at the [interest] rates.”"}],[{"start":105.6,"text":"Lending vaults, which differ from secure vaults used by some investors to keep their passwords and assets safe, allow investors to connect their crypto wallets and deposit tokens into a strategy of their choice and receive near-instant interest payments."}],[{"start":120.954,"text":"Proponents say they represent the new face of crypto. As more traditional assets such as stocks and funds become tokenised and tradeable on blockchains, backers believe vaults offer more ways to use them."}],[{"start":132.717,"text":"Currently, fintechs holding large stablecoin balances, digital asset treasury companies and hedge funds are the main depositors in vaults, said Adrian Cachinero Vasiljevic, co-founder of Steakhouse Financial, the biggest vault curator."}],[{"start":147.04,"text":"But while giving investors more control over the collateral they take than with regular DeFi lending, vaults typically have automatic mechanisms that can quickly liquidate portfolios in distress, which can exacerbate a market sell-off."}],[{"start":161.145,"text":"“In a stress scenario, things can shift very quickly,” said Andrew O’Neill, digital assets analytical lead at S&P Global Ratings, adding that in decentralised finance, problems can permeate “much faster” than traditional financial markets."}],[{"start":174.16,"text":"Hacks are also a risk. According to TRM Labs, $972mn was stolen from DeFi platforms in the first half of this year. In addition, there may be errors in the coding of smart contracts, meaning they may be caught out by unexpected situations."}],[{"start":191.018,"text":"For instance, in March, a hack at decentralised protocol Resolv caused some crypto prices to collapse. The USR token was used as collateral in some vaults, where its price was hard-coded as $1. That meant the vault did not identify that the token’s price had actually plunged as a result of the hack."}],[{"start":209.28,"text":"The lending strategies available can be complicated and involve illiquid tokens being offered as collateral. For example, one of the most popular vaults on decentralised platform Morpho lends the USDG stablecoin against tokens including a stablecoin not backed by sovereign currencies but instead backed by other crypto tokens, and another coin that tracks a pool of tokenised private credit assets."}],[{"start":231.169,"text":"Regulators are already beginning to question whether these activities need oversight."}],[{"start":235.828,"text":"The US Securities and Exchange Commission said in July it was looking at ways in which vaults may fall under securities laws."}],[{"start":243.166,"text":"“A vault that holds securities or allocates assets to investments in securities could fall into investment company territory. Some vaults may function similarly to unit investment trusts,” wrote SEC commissioner Hester Peirce, before she left the agency. “Lending strategies also can carry significant federal securities law implications.”"}],[{"start":261.84,"text":"In September, the European Securities and Markets Authority proposed regulating “gatekeepers”, entities that facilitate transactions or “act as an intermediary” between clients and DeFi services, in order to mitigate “consumer protection, operational and smart-contract risk”. Esma told the FT its proposals “are relevant to lending vaults” where crypto service providers facilitate access to them."}],[{"start":287.459,"text":"Curators “who are constantly on a day-to-day basis fine-tuning the parameters and being there on a daily basis for the movement of assets” are “more likely” to be seen as similar to traditional fund managers and may therefore face regulations, said Jonathan Galea, partner at law firm Cahill Gordon & Reindel."}],[{"start":305.611,"text":"But for a sector that is largely unregulated and is keen to stay that way, potential oversight is likely to be unwelcome."}],[{"start":313.12,"text":"For curators, “their biggest risk is tomorrow they have to become compliant,” said Kaiko’s Wenger."}],[{"start":326.16,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1792394742_4971.mp3"}