$ETH Arch wants to rebuild trust in crypto lending with $5 million in funding and a $70 million debt facility backed by Galaxy

The crypto industry may try to pretend that the collapses of 2022 are a distant memory, but the lending sector has not recovered from the catastrophic implosion of firms like BlockFi and Genesis, which provided loans to customers in exchange for often shaky collateral. Now, a growing startup thinks it can help reinvigorate the sector—while also ensuring it doesn't suffer the same fate as its predecessors.

New York-based Arch, founded by finance veterans Dhruv Patel and Himanshu Sahay, announced on Thursday it raised a $5 million equity seed round for its crypto lending practice co-led by Morgan Creek Digital and Castle Island Ventures, along with a $70 million debt facility funded by Galaxy, which will serve institutional clients and individual investors. Arch previously raised $2.75 million from Castle Island and Tribe Capital in late 2022.

"We saw a real opportunity to have a conservative approach," Patel, who previously worked at Bridgewater and Brex, told Fortune. "We've seen tremendous demand."

Turning the page

During the bull market of 2021 and 2022, crypto lending was a booming business. Firms focused on both institutional and retail customers, accepting collateral in thinly traded assets and often lending that collateral out to other clients, a risky process called rehypothecation. The process contributed to the collapse of well-known firms, including Genesis, which lent its customers' assets out to counterparties such as Sam Bankman-Fried's trading firm, Alameda Research.

While crypto markets have come roaring back over the past year, new lenders haven't emerged to fill the void left by firms like Genesis and BlockFi. Some, such as Archegos, have popped up to serve as counterparties on the other side of trades, but Patel and Sahay saw a lane for creating a lending outfit that would allow customers to deposit their crypto and receive dollar-denominated loans in exchange.