Happy Uptoper! In today’s “Crypto for Advisors”, newsletter explains Gregory Mall, Chief Investment Officer at Lionsoul Global, the development of Bitcoin-supported loans in both decentralized and centralized financial systems.
Then Lynn Nguyen, CEO of Saros, answers questions about tokenized shares in “Ask an expert.”
Thanks to our sponsor for this week’s newsletter, Grayscale. For financial advisers near San Francisco, Grayscale hosts an exclusive event, Crypto Connect, Thursday 9 October. Learn more.
– Sarah Morton
Crypto as security: What wealth managers need to know about the resurgence of the institutional loan market
Lending and borrowing has long been central to the financial markets – and crypto is no exception. In fact, security lending in the digital asset area arose well before decentralized funding (DEFI) protocols were given prominent role. The practice itself has deep historical roots: Lombard loan – using financial instruments such as security for loans – dates back to medieval Europe as Lombard merchants became known across the continent to expand credit secured with moving goods, precious metals and finally securities. In comparison, it has only taken a short time in this centuries -old model to conquer markets for digital asset.
One of the reasons why lending against crypto security is so compelling is the unique liquidity profile for the asset class: Top coins can be sold 24/7/365 in deep markets. The speculative nature of crypto also drives the demand for leverage, while loans in some jurisdictions offer loans in Lombard style tax benefits by enabling liquidity generation without triggering taxable disposal. Another important use case is the behavior of Bitcoin -Maksimalists, who are often deeply linked to their BTC holdings and reluctant to reduce their overall stack. These long-term holders typically prefer borrowing at low loan-to-value conditions, expecting Bitcoin’s price to appreciate over time.
The story of the security lending market
The first informal Bitcoin loans appeared as early as 2013. But it was under the ICO boom 2016-2017 that players in institutional style such as Genesis and Blockfi appeared. Despite Crypto Winter 2018, the market for centralized funding (CEFI), where retail -focused companies such as Celsius and Nexo joined the crisis.
The increase of Defi in 2020-2021 additional supercharged lending. Both CEFI and DEFI platforms spread, competing aggressively for depositors. But as competition intensified, the balance quality deteriorated. Several major Cefi players operated with significant discrepancies between active and wear and tear, leaning heavily on their own government tokens to strengthen the balance and relaxed insurance standards, especially with regard to haircuts and LTVs (loan-to-value conditions).
The fragility became clear in the second quarter of 2022, when the collapse of StableCOin Terrausd (UST) and Hedge Fund Three Arrows Capital (3AC) triggered widespread losses. Prominent CEFI loans – including Celsius, Voyager, Hodlnaut, Babel and Blockfi – were unable to meet withdrawal needs and entered into bankruptcy. Billions of dollars in customer assets were deleted in the process. Regulatory and court-leading post-Mortems pointed to well-known failures: thin security, poor risk management and opacity about exposures between the company. An examiner report from 2023 on Celsius described a company that marketed itself as secure and transparent, while in fact issued large unsecured and sub collateralalized loans, masking losses and working in what the examiner compared to a “ponzi-like” way.
Since then, the market has undergone a reset. The surviving CEFI lenders have generally focused on strengthening risk management, enforcing stricter security requirements and tight policies on rehypotation and exposure between the company. Nevertheless, the sector remains a fraction of its previous size with loan volume of approx. 40% of their 2021 top. Defi credit markets, on the other hand, have staged a stronger comeback: Transparency on the chain around rehypothecation, loan-to-value conditions, and credit conditions have helped recover the confidence faster and push the total value locked (tvl) back against its 2021 record levels. (Defillama).
Source: Galaxy Research
Does Cefi have a role next to Defi?
Crypto has always been driven by an ethos of on-chain transparency and decentralization. Still, CEFI is unlikely to disappear. After the crisis, the room is more concentrated with a handful of companies, such as Galaxy, Falconx and LEDN, which account for most of outstanding loans. It is important that many institutional borrowers continue to prefer to handle licensed, established financial counterparties. For these players, concerns about money laundering (AML), know your customer (KYC) and Office of Foreign Assets Control (OFAC) exposure and regulatory risks, make direct borrowing from certain defi-pools impractical or unacceptable.
For these reasons, CEFI lending is expected to grow in the coming years – albeit at a slower pace than defi. The two markets are likely to develop in parallel: Defi that provides transparency and composition, CEFI offers legislative clarity and institutional comfort.
– Gregory Mall, Chief Investment Officer, Lionsoul Global
Ask an expert
Question: How will NASDAQ’s integration of tokenized securities into the existing national market system and related investor protection investors?
This step immediately brings three thoughts in mind – distribution, efficiency and transparency. It is a game election for everyday investors who do not engage much in traditional funding. Blockchains become more scalable every year and I love the idea of ​​effective, composed decentralized financing (DEFI) use cases for tokenized securities. Connecting these assets in our industry means that we will also see far more transparency compared to older systems.
Statistics back this – the global tokenized asset market hits around $ 30 billion this year, up from only $ 6 billion in 2022. This means wider distribution – imagine a small investor in rural America earning 5 to 7% yields on tokenized shares without needing a broker’s blessing. When I move from traditional funding to defi, I have seen myself how blockchains can optimize, while I am also more transparent and inclusive. This is not just hype – it’s about helping more people build wealth through smarter, digitized tools that level the game field.
Question: What are the challenges that investors might face if Securities and Exchange Commission (SEC) approves NASDAQ’s proposal to trade tokenized securities?
Not everyone will be ordinary sailing. First, there will be technical obstacles that need to be overcome and these will affect time frames as well as user experience for investors. Mixing blockchain infrastructure with older systems is not straightforward, and this is likely to affect early adopters as well as the original spread of liquidity.
Early investors also need clearer guidance on regulation. There is a need for crystal clear guidance on token rights, as investors may have questions related to events such as benefits or voting. When introducing new technologies, it is also important to take security very seriously. Cyberattacks have spiked 25% year-over years and we have all seen the high profiled cases related to blockchains. Even if you assume this would be a priority for nasdaq.
All of these questions are looser to me. So I’m not too worried.
Q. Nasdaq has mentioned Europe’s trade in tokenized shares is “raising concerns” because investors can access tokenized US shares without actual shares in companies. How will Nasdaq’s proposal to offer “the same material rights and privileges as traditional securities in an equivalent class” Benefit Investors?
Here we are talking about benefits that include access to the same rights as traditional securities – voting, dividend and share efforts. In Europe, investors have been able to acquire securities without full rights, which I consider which resembles to have an exclusive non-fungal token (NFT) without getting the membership benefits it assigns. Imagine owning a cryptopunk but not having access to punkdao and the venture options available to holders.
Nasdaq essentially tries to prevent investors from being abbreviated. This is a big advantage because you not only have access to a more dynamic but limited version of the asset – you still get all perks. When I think of the potential here, it is exciting – imagine fully developed shares with 24/7 trade, lower fees and significantly shorter settlement times.
– Lynn Nguyen, CEO, Saros
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