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.
According to a CoinDesk report, Goldman Sachs and a handful of top banks in the US are also considering providing cash loans to other institutions using Bitcoin as collateral. While these big banks would want to steer clear of crypto spot markets, they would explore other opportunities such as synthetic crypto products like futures, it said quoting sources.
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.
Back home, a crop of new-age 'crypto banks' is already offering such loans against cryptocurrencies like bitcoin, ether, tether, among others, according to a Mint report. Vauld, Crypto.com and BlockFi are such platforms.
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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.”
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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.
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FAQs
A crypto loan is a loan issued by a crypto lending platform. When you take out a crypto loan, your cryptocurrency is used as collateral — just as your house or car would be used as collateral for a mortgage loan or auto loan. And like a traditional loan, crypto loans are paid off with interest over a set time.
How does crypto work with banks? ›
Banks can leverage crypto to avoid these fees, giving customers an easy and affordable way to send money. Banks can also provide crypto savings accounts to their customers. These accounts typically earn interest between 7% and 10%, which is much higher than the average 0.46% interest on traditional savings accounts.
What big banks are getting into crypto? ›
By now we have JP Morgan is exploring deposit tokens that would represent customer deposits on blockchain. We have Goldman involved in a variety of ways. We have a bunch of companies involved in stablecoins, which basically represent fiat. So, for instance, Cantor Fitzgerald, BNY Mellon and BlackRock.
How does cryptocurrency affect the financial system? ›
Cryptocurrencies operate on blockchains, distributed ledgers that record transactions across a vast network of computers. This erases the need for central authorities, creating a more open and transparent financial system.
How do crypto lenders make money? ›
Lenders deposit their crypto into high-interest lending accounts, and borrowers secure loans through the lending platform. These platforms then fund loans using the crypto that lenders have deposited. The platform sets the interest rates for both lending and borrowing, allowing it to control its net interest margins.
What are the risks of crypto lending? ›
Risks of Crypto Lending
If the value of the placed cryptocurrency drops significantly, borrowers may face margin calls, requiring them to provide more collateral or risk losing their assets. Another risk is the security of the lending platforms.
What will happen to banks if cryptocurrency takes over? ›
If cryptocurrencies become a dominant form of global payments, they could limit the ability of central banks, particularly those in smaller countries, to set monetary policy through control of the money supply.
Do banks consider crypto an asset? ›
Crypto-assets are subject to significant risk and boom-and-bust cycles, as the current “crypto winter” shows. They are not widely used in mainstream banking operations, yet the expansion of the crypto industry can also lead to crypto-asset risks spilling over into the banking sector.
Can banks control cryptocurrency? ›
Is Bitcoin Controlled by Central Banks? Bitcoin is decentralized, which means that central banks do not control them. Governments can regulate its use, giving them some control over it.
Which bank is the most crypto-friendly? ›
Top Crypto-Friendly Banks 2024
- Revolut. Revolut is the best-known FinTech operator headquartered in the UK. ...
- Juno. Juno is a digital banking platform with crypto-friendly features, providing services to individuals and businesses. ...
- Wirex. ...
- Bank Frick. ...
- Mercury. ...
- Ally Bank. ...
- Bank Prov. ...
- Monzo.
Throughout the years and especially during the pandemic, BlackRock's clients started asking the firm for low cost and easy access to bitcoin. BlackRock started studying the industry to develop a digital asset strategy.
Why don't banks use blockchain? ›
So, if a bank builds a solution on a public blockchain, they will need to pay transaction fees and, as a result, buy/hold the network token (i.e. crypto). This would mean banks would have to hold crypto in their ledger. Additionally, since gas fees vary so much, it would be harder for banks to forecast their outgoings.
Will crypto replace the dollar? ›
Will Cryptocurrency Replace Fiat Money? It's unlikely that cryptocurrency, in its current form, will replace fiat currency in developed countries. However, it is possible in financially struggling nations.
Will blockchain replace banks? ›
While it's unlikely that blockchain will completely replace traditional banks, it's clear that the technology will play a significant role in the future of finance. Banks may adopt blockchain technology to improve their services, leading to a hybrid model that combines the best of both worlds.
How are crypto banks different from traditional banks? ›
Decentralization and Disintermediation
One key aspect of cryptocurrencies is their decentralized nature. Unlike traditional banks that serve as intermediaries between individuals and their money, cryptocurrencies enable peer-to-peer transactions without the need for a centralized authority.
How do I pay back my crypto loan? ›
Log In to your Crypto.com Exchange account. Go to Dashboard > Lending > Loans. Tap Repay Now to make repayment to your outstanding loan.
Is it safe to take a crypto loan? ›
Crypto loans offer advantages over traditional loans — most loan providers do not require a credit check. However, cryptocurrency's volatility means there is greater risk of liquidation during a market downturn.
Are crypto loans worth it? ›
Crypto loans may have lower interest rates than traditional personal loans, but since cryptocurrencies can be volatile, they're a risky form of debt.
Do crypto loans affect credit score? ›
However, it's worth mentioning that while crypto doesn't directly impact your credit score, that's also true whether your investments are successful or not. So if you make a lot of money out of your investments it won't push your credit score up either.
