Tax restrictions, transfer limitations, and currency regulations that apply to both cryptocurrency, and other crypto-assets must be considered by the lenders. It may affect the loan structure, the transfer of proceeds, and the repayment of principal and interest.
● Lenders' Protection Against Market Volatility
Lenders must assess and implement appropriate protection against market volatility risks, especially when crypto-assets make up a significant component of the secured collateral. When the value of cryptocurrencies drops, the value of the collateral drops as well, essentially affecting the loan-to-value ratio and exposing the lender to a high risk of under-recovery in the event of a failure.
● Repayment terms
Lenders must agree on how the principal amount and the interest be paid. The kind, frequency, value, and mode of payments must all be mentioned in crypto-loan agreements.
Over-collateralization may also be a requirement of the loan being granted in the first place. The preferable choice is determined by the loan's kind and structure, such as whether it is a revolving credit facility or a term loan.
● Risks associated with lending
Cryptocurrency, like other digital assets, is vulnerable to cyber theft, phishing schemes, and the loss of access to information such as keys and passcodes. Furthermore, cryptocurrencies' blockchain protocols are subject to modifications that may impair collateral, such as splits and forks, token swaps, and roll-backs.
● Contractual agreement
Borrowers must devise and implement contractual and practical safeguards to protect the collateral and access to it for the term of the loan as well as to guarantee that the secured cryptocurrency, no matter how formed, remains within the loan's definition of "collateral."
● Market Volatility
Because of the volatile value of crypto, a margin call may occur, requiring the borrower to put up additional crypto to retain the value of the initial pledge. If the value of your pledged crypto falls below the lender's predetermined threshold, you only have a limited amount of time to pledge more coins.
● Risk of cyber security
DeFi crypto loan systems do not keep your assets or provide insurance; instead, you handle your cryptocurrency using your wallet, which you link to the web platform.
● Repayment terms
Borrowers must agree on how they will repay the principal and interest. In crypto-loan agreements, the kind, frequency, value, and mechanism of payments must all be defined.
● Unclear Regulations on cryptocurrency lending
Cryptocurrency rules are not as evolved as the technology, leading to investor skepticism of any crypto loan product. You won't be able to sue anyone if your loan amount vanishes.