Good climb! In today’s “Crypto for Advisors” bulletin, Gregory Mall, director of investments at Lionsoul Global, explains the evolution of Bitcoin supported loans in decentralized and centralized financial systems.
Then, Lynn Nguyen, CEO of Saros, answers questions on token actions in “Ask a Expert”.
Thank you to our sponsor of this week’s newsletter, Grayscale. For financial advisers near San Francisco, Graycale is organizing an exclusive event, Crypto Connect, Thursday, October 9. Learn more.
– Sarah Morton
Crypto as guarantee: what wealth managers should know about the resurgence of the institutional loans market
Loans and loans have long been at the heart of the financial markets – and the crypto is no exception. In fact, the guaranteed loans appeared in the digital asset space long before decentralized funding protocols (DEFI) are getting important. The practice itself has deep historical roots: Lombard Lending – using financial instruments as guaranteed for loans – dates back to medieval Europe, when Lombard merchants have become renowned through the continent to prolong the guaranteed credit by mobile goods, precious metals and possibly titles. In comparison, it took only a short time for this secular model to conquer the markets of digital assets.
One of the reasons why lending against cryptographic guarantees is so convincing is the single liquidity profile of the asset class: the upper parts can be sold 24/7/365 on deep markets. The speculative nature of the crypto also stimulates the demand for leverage, while in certain jurisdictions, Lombard style loans offer tax advantages by allowing a generation of liquidity without triggering taxable eliminations. Another important use case is the behavior of Bitcoin maximalists, who are often deeply attached to their BTC participations and reluctant to reduce their overall battery. These long -term holders generally prefer borrowing from loan / low value ratios, while waiting for the Bitcoin price to appreciate over time.
The history of the guaranteed loans market
The first informal bitcoin lenders appeared in 2013. But it was during the 2016-2017 ICO boom that institutional style players such as Genesis and Blockfi emerged. Despite the 2018 crypto winter, the centralized finance market (CEFI) has developed, companies focused on retail like Celsius and Nexo joining the fray.
The rise of DEFI in 2020-2021 additional for supercharged loans. CEFI and Defi platforms have proliferated, in aggressively competition for depositors. But as the competition intensified, the quality of the balance sheet deteriorated. Several large actors from the ECFI worked with significant active level discrepancies, were based strongly on their own governance tokens to strengthen assessments and softened subscription standards, in particular with regard to haircuts and LTV (loan / value ratios).
The fragility became clear in the second quarter of 2022, when the collapses of the stable la Terrausd (UST) and the Three Arrows Capital (3AC) hedge fund triggered widespread losses. The Eminent Cefi lenders – including Celsius, Voyager, Hodlnaut, Babel and Blockfi – could not respond to requests for withdrawal and went bankrupt. Billions of dollars in customer assets have been erased in the process. The regulatory post-mortems and led by the court highlighted familiar failures: thin collaterals, mismanagement of risk and opacity around interfirmal exhibitions. The report of a examiner in 2023 on Celsius described a company that has marketed as safe and transparent while actually issuing large unmarried and under-collateralized loans, masking losses and operating in what the examiner compared to a “similar to a ponzi”.
Since then, the market has undergone reset. CEFI surviving lenders have generally focused on strengthening risk management, the application of stricter collateral requirements and the tightening of policies concerning rehyperothecation and interfirm exhibitions. Despite this, the sector remains a fraction of its old size, with loan volumes at around 40% of their peak of 2021. The Defi credit markets, on the other hand, staged a stronger return: chain transparency around rehypeothecation, loan / value ratios and credit terms contributed to restore confidence more quickly, pushing the total locked value (TVL) 2021. (Defillama).
Source: Research Galaxy
Has this is a role next to Defi?
Crypto has always been pulled by a philosophy of transparency and chain decentralization. However, the CEFI is unlikely to disappear. After the crisis, the space is more concentrated, with a handful of companies, such as Galaxy, Falconx and LEDN, representing the majority of exceptional loans. It is important to note that many institutional borrowers continue to prefer to face the approved and approved financial counterparts. For these players, the concerns about the fight against money laundering (AML), know your client (KYC) and the office of foreign control assets (OFAC) as well as regulatory risks, make direct borrowing from certain impractical or imperpritable DEFI pools.
For these reasons, CEFI loans should grow in the years to come – although a slower pace than DEFI. The two markets should evolve in parallel: DEFI offering transparency and composibility, CEFI offering regulatory clarity and institutional comfort.
– Gregory Mall, Director of Investments, Lionsoul Global
Ask an expert
Q. How will NASDAQ integration of token titles in the existing national market system and the protection of related investors will benefit investors?
This step immediately recalls three thoughts: distribution, efficiency and transparency. This changes the game for everyday investors who do not engage much in traditional finance. Blockchains are becoming more and more scalable each year, and I like the idea of ​​effective and composable use cases of decentralized financing (DEFI) for tokénized titles. Connecting these assets into our industry means that we will also see much more transparency compared to inherited systems.
Statistics are behind – the global token workers market has reached around $ 30 billion this year, against only $ 6 billion in 2022. This means a wider distribution – imagine a small investor in rural America winning 5 to 7% of tokenized shares without needing a blessing of a broker. Going from traditional finance to defi, I saw myself how blockchains can optimize while being more transparent and inclusive. It is not only to threw media – it is a question of helping more people to build wealth thanks to smarter and digitized tools that level the rules of the game.
Q. What are the challenges that investors could be confronted if the Securities and Exchange Commission (SEC) approves the NASDAQ proposal to negotiate token titles?
It will not make the navigation simple. First, there will be technical obstacles that must be overcome, and they will affect deadlines as well as user experience for investors. Mixing the blockchain infrastructure with inherited systems is not simple, which will probably affect early adopters, as well as the initial prevalence of liquidity.
The first investors will also need clearer directives on regulations. There is a need for crystalline advice on the rights of tokens, because investors can be faced with issues related to events such as dividends or a vote. During the introduction of new technologies, it is also essential to take security very seriously. Cyberattacks increased by 25% from one year to the next, and we have all seen the high -level cases linked to blockchains. Although you assume that it would be a priority for the Nasdaq.
All these problems are resolved as far as I am concerned. So I’m not too worried.
Q. NASDAQ has mentioned that the trade in token actions by Europe “raises concerns” because investors can access American actions in token without real actions in companies. How will the Nasdaq proposal offer “the same material rights and privileges as traditional titles of an equivalent class” benefit investors?
Here, we are talking about benefits that include access to the same rights as traditional titles – voting, dividends and shares in shares. In Europe, investors have been able to acquire securities without comprehensive rights, which I consider as similar to the detention of an exclusive non -fascinated token (NFT) without obtaining the membership services it grants. Imagine owning a cryptopunk but not having access to punkdao and venture capital opportunities available for holders.
The NASDAQ mainly tries to prevent investors from disconnecting. This is a major advantage because you do not only get access to a more dynamic but limited version of the asset – you always get all the advantages. When I think of the potential here, it’s exciting – imagine actions in its own right with 24/7 exchanges, lower costs and much shorter settlement times.
– Lynn Nguyen, CEO, Saros
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