Babel Finance: Crypto lending service for institutional investors
The feared risk of the crypto lending sector has come true through the crypto crash
Babel is temporarily suspending payment transactions due to “unusual liquidity pressure”.
Earlier last week, Celsius Network had to suspend withdrawals and transfers by its customers due to liquidity problems. Now Babel Finance is a second major crypto lending service.
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What is Babel Finance?
Babel Finance is considered one of the leading crypto financial service providers for institutional investors. Unlike the “crypto savings bank” Celsius, where virtually every investor can store their crypto holdings for interest payments, Babel only offers its services to very wealthy customers. According to “Blockchainwelt”, there were 500 of them recently. The Hong Kong-based company Babel can thus be described as an asset manager as well as a lender that focuses on cryptocurrencies. For example, Babel only accepts Bitcoin, Ether, and stablecoins as deposits on its bank-like platform. Babel lures with the promise of double-digit returns. In the past year, the wealth manager’s holdings have more than doubled, and at the end of 2021 there were $3 billion in loan balances on the Hong Kong company’s balance sheet. In a last financing round in May 2022, Babel was valued at around two billion US dollars, and according to Cointelegraph information, the average trading volume was eight billion US dollars per month. All these numbers make Babel Finance one of the most influential funders in the crypto sector.
The Problem of Crypto Lending Services
The business model of the crypto lending platforms has an enormously high risk. The bank-like companies promise interest rates of often significantly more than five percent, with Celsius the official maximum interest rate was even 17 percent. It is therefore not surprising that the chairman of the US Securities and Exchange Commission (SEC), Gary Gensler, expressly warns against these excessively high promises of returns. Such interest rates could only be achieved with an enormous risk in the prevailing low interest rate environment.
In other words: as long as cryptocurrencies are constantly increasing in value and the entire market segment is growing – as was the case in 2020 and 2021 – this business model can work quite well: more and more investors are lending their crypto holdings to services, which in turn pay them interest – while at the same time the crypto assets, i.e. the collateral, increase in value. The big catch with this business model: Should the crypto market contract, as it has in the past few months, the crypto assets of the companies and their creditors will decrease. The result is acute liquidity problems: Crypto lending companies are less and less able to pay out their customers’ crypto assets.
This is how Babel explains the freezing
This was confirmed when just four days after Celsius, Babel, another big player in the crypto lending sector, temporarily suspended payment transactions. The company’s website, which was founded in 2018, said in a statement, “Recently, the crypto market has experienced sharp fluctuations, and some institutions in the industry have faced major risks. Due to the current situation, Babel Finance is facing unusual liquidity pressures.” The crypto company is in communication with “all parties concerned” and is pursuing the goal of the best possible protection for its investors.
Whether, when and how Babel and Celsius will resume customer service as usual will depend not least on further developments on the crypto market. However, the Terra debacle has shown that crypto investors can expect a total loss of their investments at any time.
Editorial office finanzen.net
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