The rising popularity of cryptocurrencies has prompted banks to consider ways to capitalise on the frenzy without directly participating in the crypto market. While New York-based Signature Bank and rival Silvergate have already launched bitcoin-backed cash loans earlier this year, other big banks may soon join the race with different products.
They may emulate tri-party repo arrangements—a method of borrowing funds by selling securities with an agreement to repurchase the securities on a pre-determined date. This process involves a third-party agent that facilitates the transaction, the report stated.
Crypto-backed retail loans are like any other secured loan. Borrowers use digital assets as collateral for the loan, just like a car or a house can be used as collateral for auto or mortgage loans.
Why crypto loans?
According to the CoinDesk report, the adoption of the crypto-assets by traditional institutions was inevitable as crypto is a $2.7 trillion asset class, even though it is occurring in a limited capacity for now.
The move by banks shows the appetite for crypto-collateralised loans from banks that have more stable funding sources (FDIC-insured deposits) and tougher underwriting standards than startups, the report pointed.
As Signature CEO Joseph DePaolo told CoinDesk: “We want it to be a zero-loss business. “And so we’re only going to have it for the very, very best clients. We’re going to underwrite it to death, have deep discounts and quality custodians.”
There can be many advantages of crypto-backed loans for borrowers as well. For instance, a lower international barrier. As cryptocurrency operates globally, unlike a particular fiat, borrowers can seek financial partnership with any crypto-backed lender in the world.
Also, a peer-to-peer cryptocurrency lending platform will allow people to provide microloans to each other and even profit from the loan.
According to Vauld CEO Darshan Bathija, loans against cryptos score over personal loans on many fronts than only in terms of cheaper interest rates. “There is no capital gains liability, they provide affordable leverage for trading and you get to retain your investment while getting the money worth the token’s value out,” he told Mint.
Many more big banks are expected to join the bandwagon over the next three to six months. Some banks may even use their own balance sheet to make these loans while others may use third-party services, per CoinDesk.
(Edited by : Yashi Gupta)
