Crypto lending primer

Key takeaways #

• Crypto lending lets you lend coins for interest or borrow against coins you hold as collateral.
• Rates are typically higher than bank deposits, but so is the risk — much higher.
• The 2022–2023 collapses of Celsius, BlockFi and others wiped out billions in user deposits; the “risk-free yield” they marketed was anything but.
• If you lend today, treat platform choice as the whole game: prefer regulated platforms, understand where your coins actually go, and never lend funds you can’t afford to lose.

If you’re a long-term holder, the idea of earning interest on coins you’d be holding anyway is appealing. Crypto lending promises exactly that — and, when it’s done through the wrong platform, it has delivered some of the most painful lessons in the industry’s history. This primer explains how crypto lending works, what it pays, and what went so badly wrong in 2022.

How crypto lending works #

Crypto lending mirrors fiat lending: one party hands assets to another with a promise of repayment plus interest. Two sides exist:

• Lenders deposit crypto or stablecoins with a platform and earn interest — rates have historically ranged from a couple of percent on stablecoins to more on volatile coins, well above typical bank savings rates.
• Borrowers post collateral (usually crypto worth more than the loan) and borrow against it — useful for accessing cash without selling and triggering capital gains tax, or for trading.

Interest rates are attractive precisely because the risk is higher than fiat lending: no deposit guarantee applies, and the underlying assets can be violently volatile.

Ways to lend #

There are three broad models:

1. Centralised platforms (CeFi). You deposit with a company — the likes of Nexo today — which lends your coins out to borrowers and market makers and pays you a share of the interest. Simple and polished, but you’re trusting the company’s balance sheet and risk management entirely.
2. Decentralised protocols (DeFi). Smart contracts on chains like Ethereum match lenders and borrowers automatically, with over-collateralisation enforced by code. No company can run off with deposits, but the contracts themselves can have bugs, and rates float with market demand.
3. Peer-to-peer loans. You set a rate and lend to individuals directly. Maximum control, maximum counterparty risk.

The 2022–2023 collapse: lessons from Celsius and BlockFi #

For years, centralised lenders marketed double-digit, “risk-free” yields. It couldn’t last. When crypto prices crashed in 2022:

• Celsius Network froze withdrawals in June 2022 and entered bankruptcy with a multibillion-dollar hole in its balance sheet. Customers became unsecured creditors — many recovered only cents in the dollar, years later.
• BlockFi collapsed in late 2022, brought down by its exposure to Three Arrows Capital and FTX, and went through bankruptcy before eventually repaying customers in full after litigation.
• Voyager, Celsius and others demonstrated the core flaw: these platforms re-lent, re-hypothecated and traded deposits with little transparency, so “lending” was often indistinguishable from an unregulated hedge fund holding your money.

The lessons are now standard due diligence:

• There is no risk-free yield. Double-digit returns on deposited coins were funded by risky trading. If you can’t explain where the interest comes from, you’re the product.
• Custody matters. Depositing onto a CeFi platform means giving up ownership — legally you’re often just an unsecured creditor.
• Prefer transparent structures. DeFi protocols show you the collateral rules in code; regulated products offer legal recourse. Unregulated opaque platforms offer neither.
• Australian investors have limited recourse against offshore collapsed lenders. Money sent offshore into insolvency is slow, expensive and uncertain to recover.

Should you lend your crypto? #

Only with money you can genuinely afford to lose, on a platform you’ve researched, with your eyes open about where the yield comes from. For most Australian holders, a more conservative path is staking major proof-of-stake coins — see our staking guide — which earns network rewards without re-lending your assets to third parties.

And whatever you do, keep records: interest earned is assessable income, and disposals trigger capital gains tax — see our Australian crypto tax guide.

Frequently asked questions #

Is crypto lending still a thing after the collapses? Yes, but smaller and more sober. Rates are lower, survivors publish more detail about their reserves, and regulated and DeFi options have taken share from the failed CeFi model.

What happened to Celsius and BlockFi customers? When Celsius froze withdrawals, customers became unsecured creditors in bankruptcy proceedings — many waited years and recovered only part of their deposits. BlockFi’s customers fared better and were eventually made whole through its bankruptcy plan, but only after years of uncertainty. Neither outcome is what “earn interest” is supposed to feel like.

Are crypto loans taxable in Australia? Borrowing usually isn’t a taxable event, but interest you earn lending is income, and disposing of any crypto (including to lend it, under some structures) can trigger CGT. Confirm your specifics with a registered tax agent.