Wall Street banking giant Goldman Sachs announced lending out its first-ever Bitcoin-backed loan to America's largest crypto exchange Coinbase. However, neither of the two firms has disclosed the amount or any other details regarding the deal.
Goldman Sachs Issues Its First Bitcoin-Backed Loan
As per Bloomberg, the Bitcoin-backed loan issued by Goldman Sachs was a way to deepen ties between the two crypto and traditional finance worlds.
According to Coinbase Institutional head Brett Tejpaul, "Coinbase's work with Goldman is a first step in the recognition of crypto as collateral which deepens the bridge between the fiat and crypto economies."
While the loan's dollar value is not disclosed, it was collateralized by a part of Coinbase's total Bitcoin holding. Currently, Coinbase holds about 4,487 BTC, worth nearly $131 million at the time of writing. Furthermore, the loan features 24-hour risk management, but Coinbase needs to increase its BTC collateral if prices fall too low.
While Bitcoin-backed and other crypto-backed loans are not new in the crypto industry, for Wall Street, they are novel. Furthermore, in traditional finance, cryptocurrencies are seen as risky and volatile as collateral. However, some "crypto-native" firms like Babel Finance allow miners to put up their machines as collateral for loans.
According to a blogpost from crypto hedge fund Arca, potential borrowers are looking for more such options. This loan "demonstrates the willingness of institutions to utilize new tools with old techniques."
The blogpost also added, "It is far more likely that Goldman is seeing a lot of demand for this type of transaction and is just testing the waters before making a bigger splash."
Speculations From Genesis' Managing Director
According to Genesis managing director Matthew Ballensweig, the loan-to-value for Bitcoin is usually in the 40% to 60% range. Moreover, a qualified custodian holds the collateral, and the borrower receives USD from the lender at a predetermined interest rate.
"Tenors can vary as well as other prepayment terms, but it's a simple structure to bring institutional lenders into the market," Ballensweig added.
According to Coinbase's 2021 annual report, it held over $566 million in cryptocurrencies, including $183 billion worth of Bitcoin. Furthermore, it also reported having $7.1 billion worth of cash and cash equivalents.
Ballensweig stated that Genesis has already structured similar loans with crypto-friendly banks like Silvergate Bank and Signature Bank. He added that Genesis is "exploring similar structures with large investment banks that want exposure to the space."
Traditional Financial Institutions Inching Towards Crypto
While Goldman Sachs is new to Bitcoin-backed loans, the bank entered the Bitcoin options trading space in March. At that time, the Wall Street banking giant initiated a non-deliverable bitcoin option. In brief, it was a Bitcoin derivative that paid the borrower in fiat. Furthermore, the trade was assisted by Galaxy Digital Holdings, a crypto firm founded by a former Goldman Sachs founder.
As Wall Street experiments with blockchain, multinational investment bank JPMorgan has also started blockchain in a collateral settlement. Similarly, we can expect other traditional financial institutions to follow suit.