Crypto-backed retail loans are similar to any other secured loan. Borrowers use their digital assets as collateral for a loan of representative value.
The rise of cryptocurrency has opened up a number of business opportunities for investors as well as lenders. While there are some risks associated with the crypto world, the incredible returns attract traders more intimately when compared to other investment tools. After initial hesitation, banks too have started exploring ways on how to capitalise on this craze.
In India, banks like Kotak Mahindra have begun partnering with online exchanges to support crypto payments. In the US too, banks have started looking at ways to use Bitcoin, Ether and other crypto coins as collateral for cash loans to institutions.
Simply put, crypto-backed retail loans are similar to any other secured loan. Borrowers use their digital assets as collateral to secure a loan of representative value. It is done in the same way as a car or a house can be placed as collateral for vehicle or mortgage loans.
While major banks are unlikely to get directly involved with crypto trading in the near future, there’s no stopping them from tapping the growing crypto investors.
Citing people familiar with the matter, a CoinDesk report named Goldman Sachs, an American multinational investment bank, as leading this effort. Goldman Sachs is not alone – Silvergate and Signature too announced Bitcoin-backed cash loans earlier this year. Banks are also figuring out tri-party repo type arrangements – a way of borrowing funds by selling securities with an agreement to repurchase them, involving a third-party agent. These efforts may lead to more integrated crypto prime brokerage services in the future.
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The move by banks shows that they are gaining confidence in this new and volatile sector and also that they have an appetite to take bold decisions. However, some more clarity from regulators on how cryptocurrency can be used to increase the flow of money in the market – for businesses and individuals – and drive economic growth will give confidence to banks and accelerate the process of their acceptance of Bitcoin.
