To say 2022 was a stressful year for Ledn chief executive Adam Reeds would be an understatement.

“We joke that we were like Neo in The Matrix,” said Reeds. “You’re just constantly bent over backwards dodging bullets.”

After 2022’s crypto winter price crashes left most of its former peers bankrupt, accused of fraud or both, Toronto-based Ledn is one of the last major crypto lenders operating in the world. Last valued at US$540 million in 2021, the firm’s revenue has dropped, it lost money through its exposure to collapsed crypto-trading platform FTX and FTX’s sister trading firm Alameda, and it survived a sharp crash in the value of its assets under management following FTX’s implosion in November. 

In another hit to its bottom line, this year Ledn stopped offering Bitcoin savings accounts and some other financial products to Canadians in consultation with the Ontario Securities Commission. Ledn said it is putting those products on pause in Canada as it attempts to close an acquisition of a registered investment management firm that would give it a regulatory stamp of approval to offer them.

The carnage has led some to declare crypto lending—in which companies offer yield on clients’ crypto deposits by lending them to traders that re-invest them to earn a higher rate of return—a failed experiment. Critics argue digital assets are too volatile to serve as good collateral, the promised returns are too good to sustain and the sector is too lightly regulated to provide proper consumer protection. Reeds said Ledn is out to prove them wrong.

“It’s a little bit like when the financial crisis was happening in 2008. The U.S. banks went under, the Canadian banks survived,” he said. “We get to be part of that for crypto.”

Among other financial products, Ledn offers Bitcoin-backed loans, Bitcoin-backed mortgages and a product called Ledn Savings, which offers annual percentage yields of four per cent for Bitcoin and 8.5 per cent for the stablecoin USDC. The latter type of product has been the focus of attention from regulators and the centre of controversy, especially as companies like FTX and Celsius stand accused of improperly re-investing customer assets for their own proprietary trades and products, creating a conflict of interest.

In 2021, crypto lending was hot. Interest rates were low, the price of crypto was high and both retail and institutional investors poured funds into firms like Celsius, Voyager Digital and BlockFi, who were promising sky-high returns compared to those available through bank accounts.

The Caisse de dépôt et placement du Québec invested US$150 million in crypto lender Celsius, whose chief executive Aleks Mashinsky was known for wearing T-shirts with the slogan “Banks are not your friends.” Ledn itself raised a US$70-million Series B funding round in December 2021—just seven months after raising a US$30-million Series A—which brought its valuation to US$540 million.

Things started falling apart in the summer of 2022. The collapse of the stablecoin TerraUSD sparked a broader price crash in the crypto markets, bringing crypto lending’s promise of easy money to an end. The implosion of FTX and Alameda in November led to more bankruptcies and shined a light on the cozy relationships between some crypto platforms and the trading desks that re-invest client assets.

Celsius, Voyager and BlockFi have all filed for bankruptcy. So has Genesis, a New York City-based crypto firm that once served as a lending partner to Ledn. The New York attorney general has charged Celsius’s Mashinsky with fraud.

The U.S. Securities and Exchange Commission has also charged Genesis and Gemini, another New York City-based crypto company founded by the Winklevoss twins, with violating securities law through Gemini’s crypto lending Earn program. U.S. crypto giant Coinbase has said the S.E.C. threatened to sue if it launched a similar service.

Maurice Chiasson, a Halifax-based partner at the law firm Stewart McKelvey who represents clients in banking and financing and who also represented the infamous Canadian crypto-trading platform Quadriga in its bankruptcy proceedings, said the implosion of crypto lending demonstrates the industry is re-learning the lessons of traditional finance.

“Banks are regulated industries for a reason,” he said. “It’s because many, many years ago, there were problems.”

Ledn didn’t escape the crypto version of those problems. The company had no exposure to Genesis, having ended its relationship with the New York City firm in October 2022, before its bankruptcy. However, it did have an outstanding loan with Alameda and some assets on FTX when the two firms collapsed. Ledn executives declined to comment on the size of the loan or the value of the assets.

Not long after the FTX collapse, Ledn laid off some staff—“a small adjustment,” according to co-founder and chief strategy officer Mauricio Di Bartolomeo, who declined to disclose how many people lost their jobs or what percentage of the company’s workforce they represented.

Di Bartolomeo and Reeds credit Ledn’s transparency, comparatively conservative approach to risk management and proactive engagement with regulators with keeping the company alive. They say Ledn avoids conflicts of interest by steering clear of in-house trading of client assets and forbids risky decentralized finance strategies.

The company only accepts Bitcoin, and USDC in some cases, as collateral for loans and savings account deposits. “All our stuff is very buttoned up,” said Di Bartolomeo.

Reeds said Alameda made it past Ledn’s risk management procedures by providing fraudulent financial statements. It’s very difficult to do proper due diligence on crypto companies because few accounting firms feel comfortable doing full audits, he said. “In ​​the current environment when audited financials are probably needed the most, you’re getting accounting firms, because of the perceived risk, backing away.”

Sean Stein Smith, an accounting professor at the City University of New York’s Lehman College who specializes in crypto and blockchain, agreed this is a problem.

“As of right now, there are no crypto GAAP [Generally Accepted Accounting Principles] standards, and there are no crypto auditing standards yet,” he said. “That opens up the door for bad actors.”

In the absence of auditing standards, it’s becoming popular for crypto firms to produce proof-of-reserves reports, or attestations from an outside firm that a company holds enough crypto assets to cover client liabilities. Ledn says it was the first crypto lending company to produce proof-of-reserves reports and typically issues them every six months, although its most recent one is behind schedule.

In addition to the lack of accounting standards, Ledn has to navigate a Canadian regulatory regime that’s still figuring out how the crypto sector fits in. The Ontario Securities Commission declined to comment on whether it has made any decisions about how it will regulate crypto lending, but Ledn’s decision to wind down some of its products in Canada for the time being provides some clues.

Citing “productive discussions with the OSC,” Ledn is ending Bitcoin and USDC savings accounts, as well as a loan product that allows customers to make a leveraged bet on Bitcoin, for Canadian customers until its proposed acquisition of registered investment manager Arxnovum closes. Once it does, Ledn intends to offer those products to accredited investors in Canada.

Reeds said the company received some pushback for the decision, given Bitcoin’s promise of financial openness and inclusion without government gatekeeping. Ledn hopes to eventually offer similar products to Canadian retail investors again through something like an exchange-traded fund. 

“Reactions to it were like, ‘Oh, you’re abandoning retail,” he said. “That’s not the attempt at all.”

Ledn is continuing to offer Bitcoin mortgages and Bitcoin-backed loans to Canadians. Reeds said the company has been consulting with multiple regulators and believes those products fall under consumer protection legislation and are not securities.

Daniel Fuke, a partner at Fasken who advises clients in the blockchain industry, said the OSC appears to be taking a middle-of-the-road approach to regulating crypto lending. The regulator could have simply argued the entire business should be shut down, he said.

“Credit to the OSC for allowing some of the business to continue,” he said. However, “it’s falling on Ledn to bear some industry stigma, perhaps in ways that weren’t their fault.”

Reeds doesn’t argue the actions of Ledn’s peers have given the sector a bad name. He’s hoping to redeem it.

“You’re trying to constantly come out of the shadows and say, ‘We’re doing things right,’” he said. “All of us felt pretty morally disappointed with how others in the industry had acted.”