More and more borrowers are turning to cryptocurrency to buy homes, cars and sometimes even more crypto. Startup nonbank lenders and automated, blockchain-based platforms take deposits in the form of cryptocurrency. These deposits earn higher interest rates, reports The Wall Street Journal, and are used to fund loans to borrowers who use crypto to back the loan. Borrowers can take out cash or stablecoins, depending on the lender.
Crypto banking is growing. One group of crypto lenders has $25 billion in outstanding loans to individuals and institutional clients, up from $1.4 billion just one year ago, according to the crypto research firm Messari.
Cryptocurrency lenders take a similar approach as traditional banks, The New York Times noted. Deposits are pooled to offer loans and give interest to depositors. However, banks are required by law to have reserves to make sure that if some loans go bad, customers are still able to withdraw funds. Crypto lenders are not held to this same standard.