What to check before using a crypto lender: licensing, custody, reserves and loan terms

A crypto lender lets a borrower pledge cryptocurrency as collateral for a loan, often paid out in dollars or stablecoins. Before any collateral moves, seven things can be confirmed: the exact legal lender, its authorization in the borrower's state, who holds the collateral and the keys, whether the lender may reuse that collateral, the fees, the loan-to-value (LTV) and liquidation rules, and what happens in a bankruptcy. LTV rises when collateral falls or interest accrues (opens in a new tab), and reaching the contract's liquidation threshold can trigger an automatic sale. Most of these checks can be done before a single coin is transferred.

How does a crypto-backed loan work?

The sequence is similar across lenders. A borrower applies and passes identity checks, then transfers or pledges collateral. The lender funds the loan, interest accrues, and the borrower repays. When the loan is repaid, the collateral is released. Each step can sit with a different party, which is why the first question is who the parties are.

Centralized lenders hold collateral in company-controlled accounts or with a custodian. Decentralized protocols use smart contracts and on-chain collateral rules instead. Either way, a platform may originate the loan, arrange it, hold the collateral, service payments, set thresholds or liquidate collateral, and the roles are not always held by the same entity.

Which license or authorization should a borrower check?

There is no single nationwide crypto-lending license. Depending on how a product is built, a lender may need a state consumer-lender or finance-lender license, a lending or brokering license, a money-transmitter license, a state digital-financial-asset license, or securities registration or an exemption.

Two state examples show how much this varies. California's Digital Financial Assets Law (opens in a new tab) requires covered businesses serving California residents to hold or apply for a license beginning July 1, 2026, unless exempt, and the California Financing Law (opens in a new tab) generally requires a license for originating or brokering consumer or commercial loans, subject to exemptions. In New York, the BitLicense covers virtual-currency business activity (opens in a new tab), and some activity may also require separate money-transmission authority.

A lookup follows a fixed order:

1. Find the exact legal entity, trade name, address and loan originator in the agreement.
2. Search the exact legal name on NMLS Consumer Access (opens in a new tab).
3. Read the license type, state, status, approved business name and any regulatory actions.
4. Search the state regulator's own license database.
5. Confirm the authorization covers the actual activity and the borrower's state.
6. Ask the regulator whether the product or entity is exempt, pending, or operating under another licensed entity.

A license does not establish solvency, service quality, asset safety or suitability for a particular borrower, so it answers only the authorization question.

Who holds the collateral and who controls the keys?

The answer depends on the structure. Collateral can sit with a custodian, on an exchange, in a trust or in a multisignature arrangement, and it may be segregated for one borrower or commingled with other assets. The loan agreement identifies which legal entity holds the crypto, the private keys or the control rights.

Published provider terms show the range. Under Unchained's loan page (opens in a new tab), collateral cannot be moved or rehypothecated by Unchained, Fortis Bank or the borrower acting alone, and a help page on loan collateral (opens in a new tab) describes the trust and multisignature custody arrangement. Under Figure's terms (opens in a new tab), pledged digital assets are deposited and maintained through Figure Payments Cryptocurrency Exchange Services for the benefit of Figure Lending. These are examples of published terms as of October 3, 2026, not rankings, and entity names and terms can change.

Can the lender rehypothecate collateral?

Rehypothecation means the lender lends, pledges, transfers or otherwise reuses the collateral it holds. Whether it is allowed is a matter of agreement language, so the clause to find is any permission to lend, pledge, stake, transfer, commingle or use collateral.

A ban on reuse removes one risk without removing the others. Key loss, fraud, access problems, operational failure, lender bankruptcy and contract terms remain in play whether or not the lender can reuse collateral, which is why custody and bankruptcy language still need a separate read.

What happens when collateral value falls?

On Coinbase's loan product, LTV is outstanding principal plus accrued unpaid interest divided by current collateral value (opens in a new tab). The worked example is a $100 loan against $1,000 of collateral, which produces a 10% LTV. Because interest accrues, LTV can rise even when the price does not move. When collateral falls, LTV rises, all else equal.

A low starting LTV does not prevent liquidation, because the platform's liquidation threshold still controls. On Coinbase's loan product, each Morpho market has a predetermined liquidation LTV (opens in a new tab), and reaching it can cause automatic liquidation. The agreement is where the remaining details live:

• Which LTV starts a margin call, and which LTV causes liquidation.
• How notice is sent and how much time exists to add collateral or repay.
• Which price source and exchange value the collateral.
• How liquidation is executed, including any slippage rule and fee.
• What happens during a market outage or a price-feed failure.

Adding collateral or repaying part of the loan are the usual ways to cure a margin call, and the available options depend on the lender and the loan.

What does the loan cost?

A loan can carry interest, an APR, origination, maintenance, withdrawal, wire, conversion, default and liquidation fees. The interest rate and the APR are different figures, and a rate shown on a lender's page is an advertised figure, not an average.

These figures leave out maintenance, withdrawal, wire, conversion and liquidation fees, as well as taxes and price risk. Rate type matters too, since a fixed rate and a variable rate behave differently over a loan's life. The questions to put to a lender are whether the rate is fixed or variable, whether the rate, threshold, custodian or agreement can change without a new signature, whether the loan can be repaid early without a fee or minimum interest charge, and whether the lender can sell or assign the loan.

What does proof of reserves prove?

Proof of reserves is a report or procedure meant to show that an entity controlled specified assets at a particular time, often through blockchain balances and an attestation by an accounting or verification firm. It can show wallet balances observed at a stated time, the assets included in the procedure and the entity's stated control of identified addresses. Depending on the engagement, it may include customer-balance data or a comparison with liabilities.

It does not necessarily show full liabilities, undisclosed debts or guarantees, whether assets are pledged elsewhere, or whether assets belong to customers or the company. It also does not show future solvency, whether private keys are secure, whether customers can withdraw, or whether bankruptcy law protects a customer's claim. As of the PCAOB's March 8, 2023 investor advisory, proof-of-reserves reports "do not provide any meaningful assurance to investors or the public" (opens in a new tab) and do not assure that reserves will be adequate at the report date or in the future, or that customer assets will be protected. Investors are urged to use caution with alternatives to financial-statement audits (opens in a new tab) in a July 27, 2023 SEC investor bulletin.

Does insurance protect the collateral?

FDIC insurance covers deposits at insured banks (opens in a new tab), such as checking, savings, money-market deposit accounts and CDs. Crypto assets are not insured, and FDIC insurance does not protect against the default, insolvency or bankruptcy of a nonbank crypto company (opens in a new tab).

SIPC protects specified securities and cash (opens in a new tab) when a SIPC-member brokerage fails and customer assets are missing. Digital or crypto assets that do not qualify as securities under SIPA are not protected, including unregistered digital-asset investment contracts.

A lender may also describe private crime, cyber, specie, custody or hot-wallet insurance. The questions that give those claims meaning are who the insured party is, which assets and wallets are covered, and whether the policy covers theft, fraud, key loss, hacking, insolvency or price loss. Also relevant are whether customer claims are direct or only claims against the company, which exclusions, limits and deductibles apply, whether collateral held by a third-party custodian is covered, and whether coverage continues during a bankruptcy or liquidation event.

What happens if the lender fails?

The answer sits in the agreement and in bankruptcy law. The agreement should identify which entity owns the collateral, what claim the borrower holds, and what happens if the lender or custodian fails. A borrower with a direct claim to collateral and a borrower with only a general unsecured claim are in different positions, so that question is worth asking in those words. The agreement also states whether the lender can sell or assign the loan to another company.

Two enforcement examples show why regulatory status and history belong in the check. The SEC's February 14, 2022 BlockFi release (opens in a new tab) found BlockFi's retail Interest Accounts to be securities, alleged registration violations and required BlockFi to stop selling the product in the United States. The CFTC's July 13, 2023 Celsius release (opens in a new tab) alleged fraud and material misrepresentations and described its action as the agency's first against a digital-asset lending platform.

How can a borrower check complaints and enforcement history?

Search the lender's exact legal name, parent companies, trade names, officers and known subsidiaries. The places to look:

• The CFPB Consumer Complaint Database (opens in a new tab), filtered by product, issue, state, date and company response.
• SEC litigation releases (opens in a new tab), SEC administrative proceedings (opens in a new tab) and the SEC enforcement search (opens in a new tab).
• CFTC enforcement releases (opens in a new tab).
• State regulator orders, press releases and license databases.
• PACER (opens in a new tab) and the PACER Case Locator (opens in a new tab), which allow nationwide searches by party name across federal district, appellate and bankruptcy records, and the court-approved claims agent or claims portal in a bankruptcy.

Complaint data needs careful reading. Complaints in the CFPB database are not necessarily representative (opens in a new tab), and they are generally published after a company responds or after 15 days, so the count is a signal and not proof of misconduct. A court filing may contain allegations rather than a final judgment, so the procedural posture is worth identifying. Problems can be reported to the CFPB (opens in a new tab), the SEC (opens in a new tab), the CFTC (opens in a new tab), the FTC (opens in a new tab) or the relevant state regulator.

Which warning signs point to a scam?

Advance-fee loan scams (opens in a new tab) promise credit first and demand a processing, insurance, application or other fee before funding. No legitimate lender guarantees approval in exchange for an upfront fee. Real lenders may charge an application or appraisal fee before considering an application, but paying one cannot guarantee the loan.

The warning signs include promised approval or promised profits, "no credit check" claims used to promise a loan, and fees for insurance, taxes, paperwork or release of collateral. They also include requests to send cryptocurrency to release a loan, pressure through an unexpected call, text or social-media message, claims that a government agency requires a crypto payment, a vague legal entity or missing agreement, an unverifiable license, and any request for seed phrases, private keys or wallet credentials. The FBI's IC3 2024 Cryptocurrency Fraud report (opens in a new tab) recorded 149,686 complaints and $9.3 billion in reported losses, a 66% increase in losses. The FTC's cryptocurrency scam guidance (opens in a new tab) covers the same patterns.

What questions go to the lender before signing?

The loan agreement is the document that controls, and the questions below turn its clauses into answers a lender can give in writing. Separate loan and control agreements govern Unchained's approved loans (opens in a new tab) and prevail over its general terms in a conflict, and availability varies by jurisdiction. Figure's terms (opens in a new tab) likewise incorporate additional exchange and lending terms. Reading only the marketing page can leave out the documents that apply.

1. What is the exact legal name of the lender, servicer, custodian and any key agent?
2. Which state license or exemption permits this product in the borrower's state, and what are the license number and regulator?
3. Who holds the crypto and the private keys, and is collateral segregated, held in trust or commingled?
4. May the lender lend, pledge, stake, transfer or rehypothecate it?
5. What LTV starts a margin call, what LTV causes liquidation, and which price source values the collateral?
6. How much notice and time exists to cure, and can liquidation occur without approval?
7. Which fees apply at origination, during servicing, on withdrawal, at default and at liquidation?
8. Is the rate fixed or variable, and can the lender change the rate, threshold, custodian or agreement?
9. Can the loan be repaid early without a fee?
10. What happens if the lender, custodian or servicer becomes insolvent, and is the borrower's claim to collateral direct?
11. What insurance applies, and can the policy or certificate be reviewed?
12. Does the agreement require arbitration or waive a jury or class action, and which law and venue govern?
13. Will payments be reported to credit bureaus?
14. What records will show collateral balances, valuations and transactions?
15. Which regulator receives complaints about this product?

Legal, tax and bankruptcy questions go to professionals in those fields. Inversado's financial professionals directory lists financial planners, investment firms and stock brokers by city, and a firm's registration can be looked up on FINRA BrokerCheck (opens in a new tab) and the SEC's Investment Adviser Public Disclosure search (opens in a new tab).

Frequently asked questions

What should I check first with a crypto lender?

Start with the exact legal lender, its state authorization, the custody arrangement, the liquidation terms, the fees, any insurance claims and the full agreement. The agreement and the state regulator's records are the two sources that settle most of these points.

Can a crypto lender reuse my collateral?

Only if the agreement permits it. Look for terms that allow lending, pledging, transferring, commingling or using collateral, and ask the lender to answer in writing.

Is crypto collateral FDIC-insured or covered by SIPC?

FDIC insurance does not cover crypto assets or the insolvency of a nonbank crypto company (opens in a new tab). SIPC does not protect digital or crypto assets (opens in a new tab) that do not qualify as registered securities under SIPA.

Is proof of reserves the same as an audit?

No. Proof-of-reserves reports do not provide meaningful assurance (opens in a new tab) that reserves are adequate or that customer assets are protected.

Where to go next

The Bitcoin borrowing series covers how Bitcoin-backed loans work, crypto lending risks, liquidation, taxes, DeFi versus centralized loans and borrowing against assets instead of selling them. The CFPB complaint portal (opens in a new tab) and NMLS Consumer Access (opens in a new tab) are the two official starting points for checking a specific lender.