Founded in 2019 by Juntao Zhu and Simon Lee, Hodlnaut allows users to earn up to 7.25% interest on their cryptocurrency holdings by lending them to authorized institutions. On Tuesday, the company said it had more than 10,000 users and $250 million in assets.
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Although investors will continue to accrue interest on their accounts, they will not be able to recover any assets until further notice. Hodlnaut said he first needed to stabilize his liquidity and find a long-term solution, which “will not be a short process”.
Hodlnaut is the latest company to latch onto the volatile crypto market, which has wiped out over $1 trillion in value this year. The two biggest cryptocurrencies, bitcoin and ethereum, have fallen more than 60% since their peaks in November 2021.
In May, Terraform Labs stablecoin TerraUSD (UST) and its sister token Luna collapsed, reducing their combined value from $60 billion to zero. This set off a domino effect that trapped other industry players, costing investors billions of dollars.
In July, more than a month after suspending withdrawals, New Jersey-based lender Celsius filed for Chapter 11 bankruptcy. At the time, it showed $167 million in cash, which would allow it to continue to operate while restructuring itself.
Less than a year ago, Celsius was one of the biggest players in the cryptocurrency market, with $25 billion in assets under management. It had fallen to $11.8 billion in May when the prices of major cryptocurrencies began to decline.
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Three Arrows Capital, which had invested $200 million in Luna tokens, also went into a tailspin. Crypto broker Voyager Digital issued a notice of default in June after the crypto hedge fund failed to make payments on a loan worth over $665 million. A judge in the British Virgin Islands then ordered the liquidation of Three Arrows Capital, known as 3AC, and the company filed for bankruptcy a few days later.
Liquidators said 3AC founders Su Zhu and Kyle Davies were uncooperative and their fates were unknown, according to a July 8 filing. In an interview with Bloomberg News nearly two weeks later, they acknowledged the collapse triggered widespread pain, but said death threats forced them into hiding.
The fund’s creditors have filed documents showing they owed more than $2.8 billion in unsecured debt, according to the July 22 Bloomberg News report, though that figure is expected to rise significantly.
Although Hodlnaut insisted that it had no exposure to Anchor, a lending program that allowed TerraUSD holders to deposit tokens, some reports suggested otherwise.
According to a July 14 report from Tech in Asia, which bills itself as the largest English-language technology media company that focuses on Asia, Hodlnaut could have had up to $187 million in exposure to the UST at the time of its collapse.
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Hodlnaut is known as a centralized financial platform (CeFi), which sets its own interest rates on cryptocurrency holdings. Although they generally offer higher rates than a conventional bank, crypto deposits are not eligible for government-backed protections such as Federal Deposit Insurance Corporation (FDIC) insurance.
“Hodlnaut is a shadow bank, not an asset manager, exchange or trading platform,” according to Frances Coppola, financial columnist and CoinDesk columnist. Instead of peer-to-peer lending, users allow Hodlnaut to pool funds which can in turn be borrowed by institutional borrowers.
“Customers lend their money to the platform to do whatever it wants, and they are simply unsecured creditors of the platform,” Coppola said. “They have no right to recover their funds.”