Cryptocurrency lending: Interest sources and risk taking

Cryptocurrency interest: It may seem like the best of both worlds, but it's actually a mystery.

Cryptocurrency interest sounds like the best of both worlds: you keep your assets and get sustained returns. This is exactly the slogan when the platform promotes its lending products, with interest rates much higher than current savings accounts.

This statement is only half true. Normally, what you retain is not your currency, but a right of recovery. The value of this right depends on who the counterparty is and what law should apply when a problem arises. In the EU, the answer to the second question is weaker than most people think: regulations regulating the European cryptocurrency market from 2024 clearly exclude this business from their scope of application.

Cryptocurrency lending: Surrender assets in exchange for claims

In cryptocurrency lending, you hand over your currency to another market participant within a certain period of time, and the other party will put the currency into operation and pay you fees for it. From a tax perspective, this is a temporary transfer of use rights; in popular parlance, almost all providers call it interest.

The key step occurs when you press the confirm button: your currency is transferred to a company or smart contract escrow, and there is only one number left in your account that represents the right to repay. Those who hold coins bear price risk and the risk of losing access rights; in addition to the above two risks, those who lend coins bear the additional risk of default by the counterparty. The reward is compensation for this third risk.

Where does interest in cryptocurrency lending come from?

Interest does not come from the blockchain itself. Someone has to be willing to pay for the borrowed currency, and these people are mainly traders who want to use the borrowed money to amplify their positions: those who bet on price rise will borrow stablecoins and use them to buy the currency, and those who bet on price fall will borrow the currency itself and sell it.

This leads to a pattern that has been repeatedly tested in the market cycle: When many participants want to use leverage, borrowing yields rise; when this demand disappears, yields fall. Therefore, sustained double-digit interest rates are a warning sign rather than a sign of quality. The most useful question about yield in any advertising is: Who is paying this interest and why are they doing it?

Centralized lending (CeFi): A company holds your currency and lends it to others

In centralized lending (often called CeFi), you transfer the currency to a company that pools the assets of multiple customers and lends them to institutional trading partners. Your account shows an increase in balance, and as long as there is sufficient liquidity, you can withdraw cash at the click of the button.

This convenience comes at a cost, which is reflected in the terms and regulations, not on the product page. You usually don't know to whom the currency was lent, or to what extent the provider has made term conversions-that is, converting customer funds that are readily available to be drawn into long-term loans.

The fragility of this balance was fully demonstrated in the market in 2022, when several large centralized cryptocurrency lending providers stopped withdrawing cash in just a few weeks. The person who invested the funds at that time had no fault in operating his wallet, but he still could not get the funds back. Therefore, before you hand over any balances, you must conduct a rigorous review of the provider. For specific operation methods, please refer to relevant analysis.

Decentralized lending (DeFi): Smart contracts replace counterparties, but not risk

In decentralized lending, there is no company between you and the borrower. You deposit coins into a liquidity pool managed by smart contracts. Program code determines who can borrow how much and when to liquidate their collateral; interest rates usually adjust automatically with pool utilization. In exchange, the risk was transferred to two other places.

Errors in program code : Smart contracts will execute exactly as programmed instructions, even if the programming is wrong. Audit reports from external security companies can reduce this risk, but they cannot eliminate it: audits are just a snapshot of a certain state of the code that will continue to be developed later.

Manipulated price oracle : Each loan agreement requires a price to determine when collateral is short. Oracle offers this price. If the oracle is manipulated (for example, by artificially distorting quotes in thin markets), an attacker can borrow more than the amount backed by collateral.

Overcollateralization and liquidation thresholds: The mechanism behind every cryptocurrency loan

In order for your loan balance to be repaid, the borrower must provide collateral. In the cryptocurrency market, this is achieved through overcollateralization: people who want to borrow value deposit more value than they receive. Common loan-to-value ratios (LTV) are limited to 50% to 80%, depending on currency volatility.

For example: A borrower deposits 10,000 euros worth of Bitcoin and can borrow at 60% of its value, which means he will receive 6000 euros of stablecoin. If the price of Bitcoin fell by a third, the collateral would still be worth about 6700 euros and the claims would be close to the limit. The liquidation threshold takes effect at this point: the agreement automatically sells collateral before the claim becomes unsecured.

For you as a provider of funds, this automatic mechanism is real protection, but only if the collateral can actually be sold at critical moments. When the market plunged rapidly, many positions were liquidated at the same time, sell orders encountered weak order books, and actual transaction prices were lower than expected. If there is a gap, it is called a bad debt. In the event of a default, the bad debts are borne by the provider of funds, which means you bear.

MiCA explicitly excludes lending and borrowing of cryptocurrency assets

The Cryptocurrency Asset Markets Regulation (MiCA) will apply in the EU from 2024. Under the regulation, providers need to be authorized, custody of customer assets is regulated, and costs and risks need to be disclosed. As a result, many investors believe that all businesses are covered by regulation.

But this is not the case for lending business, and the regulations themselves make it clear. Article 94 of its preamble reads:

"This regulation should not regulate the lending and borrowing of crypto assets, including electronic currency tokens, and therefore should not affect applicable national laws. The feasibility and necessity of regulating such activities should continue to be evaluated."

Other parts of the same text also direct the European Commission to first assess whether regulation of such activities is needed. Trading platforms can legitimately advertise that they have MiCA authorization and provide lending products on the same interface, but the protection terms of that authorization do not apply to the product. European securities regulator ESMA made this clear in a statement in July 2025: Institutions that provide both regulated and unregulated services must not give customers the wrong impression of the scope of protection. Therefore, your provider's authorization does not indicate how much protection your loan balance is.

There is no deposit insurance, nor is there any stablecoins

Bank deposits in the EU are protected by a statutory deposit insurance plan, up to € 100,000 per customer and institution. This protection applies to the concept of "deposit", while crypto assets are not deposits. Therefore, there is no similar legal protection for loaned coins, no matter how much the provider's interface resembles a current account.

This misunderstanding is particularly persistent when it comes to stablecoins. A token pegged to the euro is stable in price, but it is still a crypto asset. If you lend it, just like you lend Bitcoin, you give it up, and when the provider goes bankrupt, you have to queue up as an ordinary creditor. Voluntary insurance or protection funds provided by certain providers are commitments of a private law nature with limits and their reliability depends entirely on the company behind them.

Loan income is regarded as other income under Article 22, paragraph 3 of the Income Tax Act

In German taxation, loan income is treated differently from interest on savings accounts. Withholding tax does not apply here, but "service income from other income" applies. The German Federal Ministry of Finance stipulated this in its circular on crypto assets on March 6, 2025, which included a special section on lending.

There are three consequences: first, your personal income tax rate applies instead of the fixed 25%; second, there is a separate exemption limit: according to Article 22, paragraph 3, sentence 2, of the Income Tax Act, such income is exempt from tax if it falls below € 256 in a calendar year. Once this limit is exceeded, the entire amount will be taxed, rather than just the excess, because tax exemption limits operate differently from exemptions. Third, the timing of revenue recognition is important: the currencies received are valued at the market price when they are recorded and are considered to be purchased simultaneously, which initiates a separate holding period for subsequent sales.

It is this dual role of each entry that makes manual bookkeeping difficult: daily payments generate hundreds of entries a year, each with its own price and purchase date.

The ten-year clause is still in law, but the Treasury does not apply

Few rules attract outdated guidance as extended holding periods. Article 23, paragraph 1, sentence 1, No. 2, and sentence 4 of the Income Tax Law extends the speculative period of assets from one year to ten years, provided that income is earned from the use of the asset during at least one calendar year. Literally, the currency lent meets this condition.

A common saying is that the sentence has been deleted. This is not the case; it still exists in the current law and has not been changed. The problem was resolved on another level: In a circular dated March 6, 2025, the Federal Treasury clearly stated under its special subtitle that this extension would not apply to crypto assets. Therefore, for private investors, the one-year period still applies, even if the currency has been lent during this period. The difference between deleted clauses and inapplicable provisions is not nitpicking: Treasury circulars are binding on tax authorities, but not on courts.

Example calculation: What is the real rate of return after tax left?

Here are calculations that rarely appear in marketing materials. Suppose you lend 10,000 euros worth of stablecoin at an annualized interest rate of 5%. The gross income was 500 euros. The tax exemption limit of 256 euros was exceeded, so the entire amount is subject to tax. Assuming a personal tax rate of 30%, there is about 350 euros left, with solidarity surtax and church tax deducted. In addition, withdrawal fees and network fees are also deducted, and for decentralized agreements, transaction costs for each interaction are also deducted.

The result is completely dominated by another number: price. If a coin falls by 30% over the same period, then an annualized rate of return of 5% will not bring any benefits. Therefore, for most private investors, borrowing mainly makes sense only on stablecoins, because the price risk is small and yields can be seen.

Examining cryptocurrency lending products: Notes

First of all, there is a testable rule of thumb: only lend the portion of assets that you can afford after a total loss.

Separate provider review from yield comparisons. Determine who the counterparty is and what rules apply in bankruptcy, and then look at the percentages.

Compare loans and pledges in parallel. Both generate continuing income, but the risk of default is located in different locations.

Make sure the assets you have not lent are safe. Whatever part you keep yourself should be on the device where you control the key.

(As of August 16, 2026. This article is not investment advice. Price and fee structures are subject to change; please check terms with provider before purchasing.)