Goldfinch Writes Down Failed $5M Loan To Kenyan Taxi Financier

Last week, Goldfinch, an Ethereum-based real-world asset investment protocol, delivered a cautionary reminder of the risks associated with off-chain lending when Tugende, a Kenyan motorcycle company, defaulted on a $5M loan taken out via the protocol.

Warbler Labs, the team behind Goldfinch, said Tugende became insolvent after lending $1.9M of the borrowed funds to its Ugandan subsidiary, in violation of the loan agreement and unbeknownst to the Goldfinch community.

The protocol’s GFI token is down nearly 20% since the news broke.

“Warbler Labs, at the request of the Goldfinch community, is in the process of restructuring a loan to Tugende,” Goldfinch told The Defiant. “The Goldfinch protocol will correspondingly write down the senior pool for the amount of the Tugende loan, while simultaneously pursuing all options available to maximize the return from this loan over time. This is the first loan restructuring of this kind on the Goldfinch platform.”

Goldfinch is now directly exposed to Tugende Uganda, a company besieged by rising inflation and energy costs. A July 29 announcement warned investors the entire loan may be written off as a result of the restructuring. Goldfinch estimates a complete loss would drive down the senior pool’s 12-month trailing APY from 7.4% to 1.5%.

Goldfinch said the net asset value (NAV) of its Senior Pool will suffer a 3.95% write-down over the next four months because of the incident. Goldfinch’s Senior Pool offers diversified exposure across each of the lending pools hosted on the protocol, currently boasting a total value locked of $103M, according to Dune Analytics.

That TVL is unlikely to go anywhere soon, as withdrawals from Goldfinch’s Senior pool take about 2.5 years to complete.

DeFi Embraces RWAs

Real-world assets have been the talk of DeFi town recently, with RWAs promising to unlock new asset classes on-chain, generate sustainable yields, and integrate web3 with the broader financial system.

Tether has been printing money through the bear market by earning yield on its reserves, and MakerDAO generated $13.5M from what is now a roughly $2.5B portfolio of RWAs, around half of which comprise short-term U.S. Treasuries. Their success is inspiring others, with Avalanche unveiling a $50M fund to purchase natively tokenized assets, and Frax looking to custody RWAs through a Delaware corporation.

Frax Founder Proposes Expansion Into Real-World Assets

US Entity FinresPBC Would Allow Frax To Custody Cash, Bonds, Treasury Bills and Other Low-Risk Assets

The Defiant

However, real-world assets and entities can bring increased risk and complexity, with Tugende's default demonstrating many of these challenges.

Counterparty Risk

Goldfinch lent 5M USDC to Tugende in October 2021. The loan agreement featured a 24-month term at a fixed annual interest rate of 11.7%. Tugende offers asset financing for motorcycle taxi operators by providing loans enabling drivers to purchase their own vehicles.

Tugende claims to have already financed $50M worth of operations in Uganda, but Goldfinch says the local economic challenges mixed with an aggressive expansion of the subsidiary’s headcount has left Tugende Uganda’s balance sheet in shambles.

“Tugende Kenya has not had the capital it needs to grow its loan portfolio and create the profits needed to repay the loan,” Goldfinch said. “This has led to a decrease in its portfolio size and a decline in its portfolio quality over the past nine months.”

The DeFi community has been quick to criticize the terms of the agreement between Goldfinch and Tugende, highlighting the increased counterparty risks incurred by dealing with debtors based in emerging economies.

“RWA stuff is a nice narrative and all but… you're completely shit out of luck if… the borrowers rug you,” tweeted thiccy, an analyst at Scimitar Capital. “Why not buy foreign treasuries on-chain instead of lending to Kenyan motorbike companies?”

Currency Hedges

Goldfinch co-founder Blake West said "credit risk is always present in lending," but the team is working with a "top-tier law firm to restructure the loan and recover as much as possible for the community." He also clarified Goldfinch loans are "not subject to currency fluctuations."

"Borrowers are required to take out currency hedges to manage the exchange-rate risk between a borrower's local currency and USD," West told The Defiant. "In regards to Tugende, it is worth noting that they are a venture-backed company with a 10+ year track record"

Arthur Cheong, the founder and CEO of DeFiance Capital, was still skeptical of the risk/reward of lending to small businesses.

“Done enough P2P lending in my younger days to know that credit risk of lending to any SME is way higher than whatever yield you can get, especially in jurisdictions where property and creditors' rights are [not] strongly protected,” said Arthur Cheong, the founder and CEO of DeFiance Capital.

CORRECTION: Story was corrected Aug. 10 at 12:40pm EST to add that withdrawal time is about 2.5 years, and not 7.6 years. Update also included comment from Goldfinch.