Private Credit’s Risky Gamble: Could It Supercharge Crypto’s Next Crisis?
Private credit's shadow banking playbook is hitting crypto—and regulators are scrambling.
The Unregulated Pipeline
Traditional lenders won't touch most crypto projects. So private credit funds are stepping in, offering high-interest loans to exchanges, miners, and DeFi protocols hungry for capital. It's a multi-billion dollar backdoor that bypasses banks entirely.
Leverage on Leverage
This creates a dangerous daisy chain. Crypto firms use borrowed funds to boost yields, which are often just repackaged debt from other crypto firms. One major default could trigger a cascade—remember, these loans aren't sitting on any regulated bank's balance sheet.
The Regulatory Blind Spot
Watchdogs focus on public markets and registered entities. Private credit deals are negotiated behind closed doors, with minimal disclosure. It's the perfect recipe for hidden risk to build until it's too late—a classic 'finding out' phase waiting to happen.
This isn't just added risk; it's systemic risk built on opacity. The very innovation that makes crypto agile also makes it a perfect host for finance's oldest parasite: leverage in a black box. The next market crash might not start on an exchange, but in a private credit memo no one ever saw.
Private credit may inject more risk into crypto space
Private credit lumps together loans from multiple sources. According to RWA.xyz, $2.1B in private credit has been tokenized, up from just $49,000 at the end of 2024. The rapid inflow of tokens based on private credit is raising questions about whether crypto finance can absorb the risk.
Over $14B in private credit is already carried by the Figure HELOC token, although the asset is only traded on its internal market. Other tokenized private loan tokens have found their way into DeFi.
Tokenizing a basket of loans further obscures the quality of assets and can threaten crypto protocols.
Morpho turned into a vector for private credit risk
Morpho, one of the most widely used lending protocols, has already gained a reputation for supporting risky vaults and allowing user-generated curation. Most of the vaults on Morpho use crypto assets as collateral.
Some specialized vaults have started giving credits for packaged, tokenized private loans. Morpho adopted Fasanara’s F-ONE products, one of the fund’s flagship products. The package of private loans was tokenized by Midas, with the mF-ONE ticker. Fasanara has created its product mostly based on small and medium enterprise private credit.
Selected Midas users can borrow USDC against mF-ONE tokens, tapping around $2B in stablecoin liquidity.
The vault used mF-ONE as regular collateral, causing no problems for Morpho. The lending market was also curated by Steakhouse Finance.
The problem arrived when Fasanara had to write off 2% of its fund value to better reflect the valuation of the packaged loans. This affected the high-risk Smokehouse USDC vault, curated by Steakhouse Finance.
The vault is still considered reasonably risk-free, currently carrying over $23M in available liquidity. The Smokehouse mF-ONE USDC vault turned a year old today and has been healthy in terms of collateral and liquidity. Only 36 wallets hold mF-ONE tokens, based on Etherscan data.
Steakhouse explained that a 2% drop in the collateral price was not a problem, especially given the much higher crypto volatility.
Despite the low impact, startups like D2 Finance warned that tokenized private loans may not be suitable for crypto DeFi platforms. D2 also warned Obex about using RWA collaterals in the Sky Ecosystem.
Obex raised $37M, aiming to turn into an incubator, issuing RWA-backed stablecoins. A MOVE like that can increase the contagion potential from tokenized private loans. Issuing stablecoins based on private loans can lead to the loss of collateral value and de-pegging.
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