Happy increase! In the “Crypto for Advisors” Bulletin today, Gregory Mall, Director of Investments of Lionsoul Global, explains the evolution of loans backed by Bitcoin in decentralized and centralized financial systems.
Then, Lynn Nguyen, CEO of Saros, answers questions about tokenized actions in “Ask to an expert.”
Thanks to our sponsor of this week’s newsletter, Grayscale. For financial advisors near San Francisco, Grayscale is organizing an exclusive event, Crypto Connect, on Thursday, October 9. Learn more.
– Sarah Morton
Crypto as a guarantee: what Heritage administrators should know about the resurgence of the institutional loan market
Loans and loans have long been central to financial markets, and cryptography is no exception. In fact, collateralized loans emerged in the digital asset space long before decentralized finance protocols (Defi) won prominence. The practice itself has deep historical roots: Lombard loans, using financial instruments as a guarantee for loans, dates back to medieval Europe, when Lombard merchants became recognized throughout the continent for extending the credit insured by mobile goods, precious metals and finally values. In comparison, this age model has taken a little time to conquer digital asset markets.
A reason why loans against cryptographic guarantee is so convincing is the unique liquidity profile of the asset class: the upper currencies can be sold 24/365 in deep markets. The speculative nature of cryptography also promotes the demand for leverage, while in some jurisdictions Lombard -style loans offer tax advantages by allowing liquidity generation without triggering taxable provisions. Another important case is the behavior of Bitcoin maximalists, who are often deeply united to their BTC holdings and reluctant to reduce their general battery. These long -term holders generally prefer loans at low loan relations to value, with the expectation that the price of Bitcoin will appreciate over time.
The history of the collateralized loan market
Bitcoin’s first informal lenders already appeared in 2013. But it was during the 2016-2017 ICO boom that institutional-style players such as Genesis and Blockfi emerged. Despite the cryptographic winter of 2018, the centralized finance market (CEFI) expanded, with companies focused on retail trade such as Celsius and link that bind to the fray.
The increase of defi in 2020-2021 plus supercharged loans. CEFI platforms proliferated, aggressively competing for depositors. But as the competition intensified, the quality of the balance deteriorated. Several important CEFI players operated with important mismatches of assets-responsibility, strongly supported their own government tokens to reinforce the balances and subscription standards relaxed, especially with respect to hair and LTV cuts (loan relations to value).
The fragility became evident in the second quarter of 2022, when the collapses of the stablecoin terrausd (UST) and the coverage fund Tres Flecher Capital (3ac) triggered generalized losses. CEFI prominent lenders, including Celsius, Voyager, Hodlnaut, Babel and Blockfi, could not meet retirement demands and declared bankruptcy. Millions of dollars were erased in customer assets in the process. The regulatory post -led posts and directed by the Court indicated family failures: thin collaterals, poor risk management and opacity around the exhibitions between companies. The report of a 2023 examiner about Celsius described a business that was marketed as safe and transparent, while actually issued by large loans not guaranteed and sub-collateralized, masking losses and operating in what the examiner compared with a “similar to Ponzi” way.
Since then, the market has suffered a restart. CEFI lenders survivors have generally focused on strengthening risk management, enforcing the strictest collateral requirements and hardening policies on rehipotecation and exhibitions between companies. Even so, the sector remains a fraction of its previous size, with loan volumes to approximately 40% of its 2021 peak. Defi credit markets, on the contrary, have organized a stronger return: transparency in the chain around rehipotecation, loan-value relations and credit terms have helped restore confidence in a faster way, pushing the total value blocked (TVL) its record levels of 2021 (defillama).
Source: Galaxy Research
Does CEFI have a role with Defi?
Cryptography has always been driven by an ethos of transparency and decentralization in the chain. However, CEFI is unlikely to disappear. After the crisis, the space is more concentrated, with a handful of companies, such as Galaxy, Falconx and Ledn, which represent most pending loans. It is important to note that many institutional borrowers continue to prefer to deal with licensed and licensed financial counterparts. For these players, concerns about money laundering (AML), know your client (KYC) and the Office of Foreign Assets Control Exhibition (OFAC), as well as regulatory risks, make direct loans from certain defi groups practical or inadmissible.
For these reasons, CEFI loans are expected to grow in the coming years, although at a slower pace it defines. It is likely that the two markets evolve in parallel: DEFI providing transparency and composition, CEFI that offers regulatory clarity and institutional comfort.
– Gregory Mall, Investment Director, Lionsoul Global
Ask an expert
Q. How will investors benefit the integration of Nasdaq of tokenized values ​​in the existing national market system and protections related to investors?
This step immediately brings three thoughts to mind: distribution, efficiency and transparency. It is a change of play for everyday investors who do not participate much in traditional finances. Block chains are becoming more scalable every year, and I love the idea of ​​efficient use cases and decentralized finance compounds (defi) for tokenized values. Connecting these assets to our industry means that we will also see much more transparency compared to inherited systems.
Statistics support this: the global tokenized asset market is reaching around $ 30 billion this year, compared to only $ 6 billion in 2022. This means a broader distribution: imagine a small investor in rural America that obtains yields from 5 to 7% in tokenized shares without the need for a blessing of runner. Going from traditional finance to Defi, I have seen how blockchains can optimize and at the same time be more transparent and inclusive. This is not just exaggeration: it is about helping more people develop wealth through smarter digitized tools that level the playing field.
Q. What are the challenges that investors could face whether the Bag and Securities Commission (SEC) approves Nasdaq’s proposal to exchange tokenized values?
Not everything will be a simple navigation. First, there will be technical obstacles that must be overcome, and this will affect the deadlines and user experience for investors. The blockchain infrastructure mixture with inherited systems is not simple, and this will probably affect the first users, as well as the initial prevalence of liquidity.
The first investors will also need a clearer orientation about regulation. There is a need for crystalline guidance on tokens rights, since investors can face problems related to events such as dividends or vote. By introducing new technologies, it is also essential to take security very seriously. Cyber ​​attacks have increased 25% year after year, and we have all seen high profile cases related to blockchains. Although I would assume that this would be a priority for Nasdaq.
All these problems can be solved in what is concerned. So I’m not too worried.
P. Nasdaq has mentioned that the commerce of tokenized shares in Europe is “raising concerns” because investors can access American actions without real actions in companies. How Nasdaq’s proposal to offer “the same material rights and privileges as the traditional values ​​of an equivalent class” will benefit investors?
Here, we are talking about benefits that include access to the same rights as traditional values: vote, dividends and capital stakes. In Europe, investors have been able to acquire values ​​without all rights, which I consider similar to having a non -fungible (NFT) exclusive token without obtaining the membership benefits it grants. Imagine to own a cryptopunk but not have access to Punkdao and the risk opportunities available for the holders.
Nasdaq is essentially trying to prevent investors from becoming change. This is an important benefit because it is not only receiving access to a more dynamic but limited version of the asset: it is still obtaining all the advantages. When I think about the potential here, it is exciting: imagine completely incipient actions with 24/7 negotiation, lower rates and significantly shorter settlement times.
– Lynn Nguyen, CEO, Saros
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