Cred Is First, Big Bitcoin Intermediary to File for Bankruptcy in US

US-based cryptocurrency lending platform Cred Inc. filed for bankruptcy on Saturday, a week after it announced a freeze on customer funds amid concerns about fraudulent activity on its platform.

Cred—which provides interest on cryptocurrency deposits and loans backed by crypto collateral,  listed estimated assets of between $50 million and $100 million, and liabilities of between $100 million and $500 million. 

According to Wall Street and blockchain veteran Caitlin Long, the filing sets a precedent, as Cred becomes the first, big US crypto intermediary to file for bankruptcy. (Other large crypto firms to have filed are Japan’s Mt. Gox, and Canada’s Quadriga.) 

“Fraudulent activity”

Cred was founded in 2017 and is based in San Francisco. It provides “insurance, licensing, and liquidity” for customers, according to its website, while taking only a small service charge. It raised $26.4 million in a 2018 ICO of its LBA token, and serves customers in 190 countries, offering interest rates of up to 10% on more than 30 crypto and fiat currencies through its partner network.

In 2019, crypto trading platform Uphold partnered with Cred, and Cred’s CEO Dan Schatt, was appointed as one of Uphold’s board members.

The first sign of trouble came on October 29, when Cred  announced that it was halting customers deposits and withdrawals linked to its interest-bearing service CredEarn. 

“Cred has experienced irregularities in the handling of specific corporate funds by a perpetrator of fraudulent activity that has negatively impacted Cred’s balance sheet and precipitated a law enforcement investigation into the loss of these funds,” Cred support staff told Decrypt in an email.

The startup said it was carrying out internal accounting of its assets, and, in consultation with legal counsel, had determined to temporarily freeze customer funds. The statement suggested that Cred suspected the loss might have been an inside job.

In the same month, Uphold told customers that it had “decided to discontinue its relationship with Cred. Today, it announced plans to sue it's former partner, and pledged to return lost funds to Uphold users who had been affected. 

“Cred appears to have had the extraordinary bad luck of employing an alleged fraudster, who is accused of stealing money and making bad investments,” Uphold wrote in a blog post.

Upholding the law

But less than two weeks later, Cred filed for Chapter 11 bankruptcy protection in Delaware.

Filing in the north-eastern state does not bode well for customers' funds, according to Long. 

Unlike pioneering states led by Wyoming, Delaware has not yet legislated on cryptocurrencies, which is likely to make for messy proceedings.

Long also suggested that Cred’s situation brought to mind that of a fractional reserve, which profits by loaning part of their customers' deposits, while only storing a small fraction of it as available for withdrawal. 

“There’s ZERO transparency or counterparty credit risk analysis available for BTC lenders,” she tweeted. “What’s fascinating [about] the collapse of intermediaries in #bitcoin is that they’ve usually been blamed on hacking initially, but then it comes out they were actually running fractional for a long time.” 

She warned that more vigilance is necessary as financial institutions can often stay liquid long after they’re insolvent: 

“Be careful not to blindly accept the “we were hacked” excuse again—it’s an easy scapegoat that hurts #bitcoin overall & it may or may not prove true,” she said.

A wake-up call for the industry 

Cred tweeted that none of its systems, customer accounts, or customer information were compromised by the fraudulent activity, but it’s still unknown how many users were affected and the extent of the funds that have been frozen. 

Others have also warned that Cred’s situation should be a wake-up call for the industry, and rival crypto lenders, such as Celsius, have offered to help users recover their funds.

“Cred's loss of funds is a reminder that crypto lenders are responsible for the security and sound reputation that digital banking needs to progress,” said Antoni Trenchev, managing partner at Nexo, another rival crypto-lender, which boasts 800,000 users, and claims to have processed over $3 billion in the past two years. 

He added that failure to act would “bring greater scrutiny to our still-nascent industry.”