Crypto Vault Deposits Hit $10 Billion as Regulators Examine Lending Risks

Crypto lending vaults have drawn more than $10 billion in deposits as investors increasingly turn to digital asset lending for yield, the Financial Times reported. The rapid expansion is also highlighting concerns over collateral risks, limited liquidity and smart-contract security, prompting regulators to examine the sector more closely.

Deposits have risen from about $4 billion at the start of last year, reflecting growing interest in putting stablecoins and other cryptocurrencies to work through lending strategies.

These products operate through smart contracts on decentralized finance (DeFi) platforms. Each vault is managed by a curator who selects lending opportunities, establishes risk limits and earns fees for overseeing the strategy. Typical annual returns range from 3% to 10%, although higher-risk approaches can generate yields of 20% or more.

However, the potential rewards come with significant exposure. Some loans are backed by assets that may be difficult to sell, including illiquid tokens, crypto-backed stablecoins and tokenized private credit. If collateral prices fall or market liquidity dries up, depositors could suffer losses.

Automated liquidation mechanisms may intensify sell-offs during market downturns. Security breaches, coding flaws and inaccurate pricing systems add further risks. While smart contracts are publicly accessible, allowing users to examine how vaults function, investors may focus on advertised yields without fully understanding the risks behind them.

Fintech companies, digital asset treasury businesses and hedge funds are among the major depositors using these products, according to the report.

Bitcoin-backed lender Two Prime is one firm expanding into the market. In September, it introduced a Bitcoin lending vault on Pareto targeting annual yields of 1.5% to 2% through institutional lending. The vault accepts wrapped Bitcoin (WBTC), requires a minimum deposit of 5 WBTC and has approximately $10 million in Two Prime capital committed to absorb initial losses.

Regulators are now assessing whether existing rules should apply to these products. The U.S. Securities and Exchange Commission has raised questions about vaults that hold securities, while European regulators have proposed supervising intermediaries that help users access decentralized finance services.