Crypto lending means handing coins to a company or a smart contract that lends them on and passes part of the interest back. Lenders advertised rates far above bank savings until 2022, when four of the largest serving US customers froze withdrawals within about five months of each other. This guide covers where the yield came from, why those lenders failed, what their customers recovered and how bank interest differs. Crypto itself is volatile and can lose most or all of its value; the crypto hub covers the basics.
How does crypto lending work?
A crypto lender takes deposits of coins, lends them to borrowers at a higher rate and keeps the spread, paying depositors a variable rate in coins. The SEC's 2022 order against BlockFi describes the model: customers lent crypto to the company in return for a variable monthly interest payment, and the company lent those assets on to institutional borrowers.
The borrowers were mostly trading firms and hedge funds, such as Three Arrows Capital and Alameda Research, the trading arm tied to FTX, plus retail customers borrowing against their own crypto. A depositor had no say over who borrowed and usually no view of the loan book.
The legal form matters more than the marketing. A deposit in these programs was generally a loan to the company, and some terms transferred ownership of the coins outright: in January 2023 a bankruptcy court held that coins in Celsius's interest program belonged to Celsius, as whether crypto is safe on an exchange explains. Some terms also allowed rehypothecation, reusing deposited or pledged coins by lending them on or posting them as collateral for the lender's own borrowing.
Where does crypto lending yield come from?
From borrowers paying more than depositors receive; when that fell short, lenders took bigger risks to keep paying the advertised rate. Any rate above what the US government pays is compensation for risk, and with the Fed's target range at 3.75% to 4.00%, a lender offering several points more is being paid to carry something.
- Overcollateralized loans. The borrower posts more value than it borrows, so a price fall can be covered by selling the collateral, provided the lender acts in time.
- Thinly secured loans to trading firms. These pay more because borrowers can fail. Genesis lent Three Arrows Capital $2.36 billion; when the fund defaulted in June 2022, liquidating its collateral raised about $1.16 billion.
- Trading with customer coins. Lenders ran their own strategies, adding market risk on top of credit risk.
- Rewards in a platform's own token. These are worth only what the token is worth, and prosecutors said Celsius used customer deposits at times to buy its CEL token and prop up the price.
The SEC's complaint against Celsius shows how far the story could drift from the reality. The company repeatedly said it made no uncollateralized loans, yet in 2022 those loans ranged from $1.3 billion to $1.96 billion, 34% to 48% of its institutional loan book. It also claimed to pay customers 80% of its revenue, when it frequently paid much more because it could not earn enough. Its founder pleaded guilty and was sentenced in May 2025 to 12 years in prison.
Staking is a different source of yield, paid by the network itself rather than a borrower, with risks covered in what is crypto staking.
Why did Celsius, Voyager, BlockFi and Genesis fail?
They made concentrated, often thinly secured bets with customer coins while promising withdrawals on demand, and ran out of cash when crypto prices fell in 2022. The trouble moved from one firm to the next.
It started in May 2022, when Terra's UST stablecoin and its sister token LUNA collapsed. Three Arrows Capital, a hedge fund that had borrowed from several lenders, defaulted in June. FTX's failure in November then hit the lenders that had relied on it or lent to Alameda.
| Lender | Froze withdrawals | Filed for bankruptcy | What broke |
|---|---|---|---|
| Celsius | June 12, 2022 | July 13, 2022 | Risky trading and uncollateralized loans hidden from customers, according to the SEC |
| Voyager | July 1, 2022 | July 5, 2022 | Three Arrows defaulted on a loan of 15,250 BTC and $350 million in USDC |
| BlockFi | November 10, 2022 | November 28, 2022 | Money owed by Alameda, assets stuck on FTX and an undrawn FTX credit line |
| Genesis | November 16, 2022 | January 19, 2023 | A loss of about $1.2 billion on Three Arrows, then Alameda's collapse; it owed creditors at least $3.4 billion |
Each failure had warning signs in hindsight. Celsius held about $25 billion at its peak in late 2021, prosecutors said, while marketing itself as the safest place for crypto. BlockFi had paid $100 million to the SEC and 32 states nine months before it froze, after the SEC found that its interest accounts were unregistered securities and that its website had misstated the risk of its loan portfolio for more than two years. Genesis's parent covered most of the Three Arrows loss with a $1.1 billion promissory note due in 2032 at 1% interest, which New York's attorney general later described as an illiquid obligation that left the hole in Genesis's finances unchanged.
The common thread is a liquidity mismatch. Customers could ask for coins back at any moment, while the coins sat in term loans, illiquid positions or failed borrowers, so the first wave of withdrawals emptied the till.
What did customers of the failed lenders get back?
Anywhere from half to all of their claims, usually in dollars fixed at the filing date and paid a year or more later. US bankruptcy law values a claim in dollars as of the day the petition is filed, so customers did not share in later price gains unless a plan returned coins in kind.
| Lender | Recovery | Paid in | When |
|---|---|---|---|
| Voyager | About 70% of allowed claims: 35.72%, then 34.28% | Crypto or USDC first, then by check | 2023 and 2024 |
| Celsius | About 72.1% of eligible claims by February 2026 | Crypto or cash | 2024 to 2026 |
| BlockFi | 100% of allowed claims; a one-time 50% on claims under $3,000 | BTC, ETH and USDC in kind for some holdings, otherwise cash | 2024 |
| Genesis, through one exchange's Earn program | 100% of the coins owed | In kind, coin for coin | May and June 2024 |
Celsius creditors have received about 72.1% of the petition-date value of eligible claims, including Earn claims, after the fourth distribution in February 2026, and its plan took effect on January 31, 2024, more than 18 months after it filed. BlockFi's full repayment came from $874.5 million of claims against FTX and Alameda, settled in March 2024 and sold at a premium in July 2024, and its plan valued each claim at the dollar value of the customer's assets when the platform shut down.
The Genesis case shows how much terms and structure mattered. About 232,000 customers of one exchange's Earn program, which lent their coins to Genesis, got every coin back under a settlement with New York's financial regulator, most on May 29, 2024 and the rest by June 21. Because they received coins rather than 2022 dollars, the exchange put the value of the first payout at 232% of what the coins were worth when withdrawals stopped. The same market crash produced coin-for-coin repayment in one case and about 70 cents on the dollar in another, and in every case customers could not sell or move their coins while they waited.
How is DeFi lending different?
A DeFi lending pool replaces the company with a smart contract: loans are overcollateralized, rates follow a public formula and liquidations happen automatically. Every position is visible on chain, which removes the risk of a lender quietly making unsecured loans.
It does not remove the risk of losing deposits. A coding flaw can let an attacker drain a pool, a faulty or manipulated price feed can trigger wrong liquidations or let bad loans through, and a crash in a collateral token can leave debts larger than the collateral behind them. Terra showed the extreme. Its Anchor Protocol advertised 19% to 20% a year on deposits of UST, and close to 14 billion UST, about 74% of the supply, sat in it just before UST lost its peg in May 2022 and fell close to zero.
What is DeFi walks through a liquidation step by step, and the stablecoin depeg glossary entry explains what happens when a dollar token breaks.
Why does bank interest come with protections crypto yield lacks?
A bank deposit is federally insured up to set limits, while a crypto lending balance is typically an unsecured loan to a private company. FDIC insurance covers $250,000 per depositor, per insured bank, per ownership category, and the FDIC says no depositor has lost a penny of insured funds since it was founded in 1933.
That coverage has hard edges. The FDIC lists crypto assets as not covered, and its insurance does not apply when a non-bank company fails, even one that keeps customer cash at an insured bank. Banks also face capital rules, regular examinations and a resolution process meant to keep access to insured deposits uninterrupted; customers of the 2022 lenders got a bankruptcy court instead. FDIC insurance explained covers the coverage rules, FDIC vs SIPC compares the two schemes, and stablecoin yield vs bank interest applies the comparison to dollar tokens.
How much extra yield does it take to cover a failure?
The extra interest has to outweigh the chance that the lender fails multiplied by the share of the deposit lost if it does. A modest-looking chance of failure can wipe out years of extra interest.
Worked example: $10,000 for one year: insured savings vs a 9% crypto lending account
Inputs: insured savings at an assumed 3.75%, the bottom of the Fed's target range as of October 28, 2026; a lending account at an assumed 9%; a failure at year-end with the 72.1% recovery Celsius creditors had received by February 2026.
- Insured savings: $10,000 × 1.0375 = $10,375.
- Lending account, no failure: $10,000 × 1.09 = $10,900, or $525 more.
- Lending account, failure: $10,900 × 0.721 = $7,859, or $2,516 less than savings.
- Break-even: $525 ÷ ($10,900 − $7,859) ≈ 17%. Above that yearly chance of failure, the lending account comes out behind on average.
- With a total loss instead, as Anchor depositors effectively suffered: $525 ÷ $10,900 ≈ 4.8%.
In 2022, four large lenders serving US customers froze within about five months. The example also ignores the wait: a recovery paid 18 months later is worth less than money available today.
What are the risks of crypto lending?
The main ones are borrower default, runs on withdrawals, misuse of deposits, weak standing in bankruptcy and, in DeFi, code failures, on top of crypto's price swings. Most of them stayed invisible until withdrawals stopped.
- Credit risk. Returns depend on borrowers you cannot see, and one default, like Three Arrows', can sink a lender.
- Liquidity mismatch. Withdrawals promised on demand cannot be met when the coins are tied up elsewhere.
- Rehypothecation and ownership. Coins lent on or pledged again may not be there, and terms that hand ownership to the platform leave customers as unsecured creditors.
- Misrepresentation. The SEC found that BlockFi misstated the risk of its loan book, Celsius's founder pleaded guilty to fraud, and outsiders had no way to check either firm's claims.
- Bankruptcy terms. Claims are usually fixed in dollars at the filing date, small claims can be paid on different terms, and payouts take a year or more.
- Code and collateral. In DeFi, bugs, price-feed failures and collateral crashes can leave a pool short.
- Price. Interest paid in a falling coin does not offset the fall, and rewards in a platform's own token add that token's risk. Crypto can lose most or all of its value; crypto market cycles covers past drawdowns.
Questions to ask before lending crypto
- Who borrows the coins, and is every loan overcollateralized?
- Do the terms keep the coins yours, or transfer ownership or allow rehypothecation?
- Are customer assets segregated, and which legal entity holds them?
- Is the product registered or supervised, and by whom?
- Can the platform pause withdrawals, and how fast can you get out?
- Are audited financial statements published?
- How far above Treasury rates is the yield, and what risk explains the gap?
An older blog post on earning interest on USDC lists the usual routes; run each one through the checklist above. How much of a portfolio belongs in crypto at all is a separate question, covered in how much crypto to hold.