What should wealth managers know about the Resurrection of the Institutional Loan market
Happy uptper! In the newsletter today “Crypto for Advisors”, Gregory Mall.
Then, then, Lynn NguyenCEO of Saros, answering questions about tokenized stocks in “Ask an expert.”
Thanks to our week’s newsletter sponsor, Grayscale. For financial counselors near San Francisco, Grayscale has been hosting an exclusive event, Crypto Connect, on Thursday, October 9. Learn more.
Crypto as Collateral: What should wealth managers know about the Resurrection of the Institutional Loan market
Lending and borrowing has long been the center of financial markets – and crypto is no exception. In fact, collateralized lending appeared in the digital asset space properly before the decentralized financial protocol (DEFI) gained popularity. The skill itself has deep roots in history: Lombard lending -using financial instruments as collateral for loans -dates back to medieval Europe, when Lombard merchants became known -recognized throughout the continent for expanding credit that was secured by the transfers -transferred goods, precious metals, and security. By comparison, it took only a short time for the year -old model to conquer digital asset markets.
One factor that lending against crypto collateral is very compelling is the unique profile of asset class: Top coins can be sold 24/7/365 in deep markets. Crypto’s imaginary nature also drives demand for action, while some constituents Lombard-style loans offer tax advantage by enabling the generation of liquidity without inciting taxes that can be taxed. Another important case of use is the behavior of Bitcoin maximalists, which often deeply attach their BTC handles and hesitates to reduce their overall clamp. These long-term holders generally prefer borrowing the low-ratios of the dedication, with the hope that the price of Bitcoin will be appreciated over time.
The history of the Collateralized Lending Market
The first informal lending of Bitcoin appeared early in 2013. But it was during the 2016-2017 ICO boom that institutional-style players such as Genesis and Blockfi emerged. Despite the winter of the 2018 crypto winter, the centralized financial market (CEFI) expanded, along with retail -focused companies such as Celsius and Nexo to join the Fray.
The Defi increase in 2020-2021 further supercharged lending. Both Cefi and Defi platforms are spreading, aggressively competing for depositors. But as the competition intensifies, the quality of the balance sheet deteriorates. Many major CEFI players have run significant properties of property, leaning over their own management tokens to strengthen balance sheets, and relaxing writing standards, especially about haircuts and LTV (ratios of the-importance).
The destruction became clear in the second quarter of 2022, when the collapse of the Stablecoin Terrausd (UST) and the hedge fund of three arrow capital (3ac) contacted widespread losses. Cefi lenders – including Celsius, Voyager, Hodlnaut, Babel, and Blockfi – did not meet the removal requests and entered the losses. Billions of dollars in customer ownership are removed from the process. Post-mortem led by the court and court are directed at familiar failures: thin collateral, poor risk management, and opacity around inter-firm exposures. A 2023 Celsius reviewer described a business that sold itself as safe and transparent while in the fact that it releases large unsecured and under-collateralized loans, losses, and operations to what the reviewer compared to a “ponzi-like” fashion.
Since then, the market has undergone a reset. Survivors CEFI lenders are generally focused on strengthening risk management, implementing stricter collateral requirements, and strict rules around rehpothecation and inter-firm exposures. Although, the sector remains a small portion of its former size, with a loan volume at about 40% of their 2021 climax. The defi credit market, in contrast, presented a stronger return: on-chain transparency around rehypothecation, ratios of value, and credit terms have helped restore confidence faster, pushing the total amount locked (TVL) back to 2021 record levels. (Delete).
Source: Galaxy research
Does Cefi have a role next to Defi?
Crypto is always driven by an ethos of on-chain transparency and decentralization. But Cefi is not likely to lose. Following the crisis, the space is more concentrated, with a number of companies, such as Galaxy, Falconx, and LEDN, which provide most of the remaining loans. Essentially, many institutional lenders continue to prefer dealing with licensed, established financial counterparts. For these players, concerns around anti-money laundering (AML), know your customer (KYC), and exposure to the Office of Foreign Assets Control (OFAC) as well as regulatory risks, make direct borrowing from some defi pools that are impractical or improper.
For these reasons, CEFI lending is expected to grow in the coming years – even at a slower pace than the Defi. The two markets are likely to change in parallel: Defi that provides transparency and composability, CEFI offers clarity of regulation and institutional comfort.
– Gregory Mall, Chief Investment Officer, Lionsoul Global
Ask an expert
Q. How does NASDAQ integrate tokenized securities into the existing national market system and related protection of investors benefit investors?
This step immediately brings three thoughts to the mind – distribution, efficiency, and transparency. This is a game-changer for everyday investors who are not engaged in traditional finances. Blockchains become more scalable each year, and I like to have the idea of great, composable financial decentralized (DEFI) that uses cases for tokenized securities. Plugging these properties in our industry means we can also see more transparency than legacy systems.
These statistics – the global tokenized asset market enters around $ 30 billion this year, from just $ 6 billion to 2022. This means a broader distribution – think of a small American country investor earning 5 to 7% that results in tokenized stocks without the need for a broker’s blessing. Moving from traditional finances to the Defi, I find myself how to optimize blockchains while clearer and included. It’s not just this hype – it’s about helping more people develop wealth through smarter, digitized tools level playing field.
Q. What are the challenges that investors can face if the Securities and Exchange Commission (SEC) approved the NASDAQ proposal to exchange securities tokens?
It’s not going to everyone to be a simple sailing. First, there will be technical barriers that need to be overcome, and these will affect timeframes as well as user experience for investors. Mixing blockchain infrastructure with legacy systems is not straightforward, and it is likely to affect early adopters, as well as the initial spread of liquidity.
Early investors will also need a clearer regulation guide. There is a need for a clear crystal guide to token rights, as investors may face issues related to events such as dividends or voting. When introducing new technologies, it is also important to take security seriously. Cyberattacks spy 25% year-year, and we all see high-profile-related cases related to blockchains. Even if you assume it will be a priority for NASDAQ.
All of these issues will be solved until I am concerned. So I don’t care too much.
Q. Nasdaq has mentioned European trading of tokenized stocks “raises concerns” because investors can access tokenized US equality -equivalent to the US without actual sharing with companies. How to offer NASDAQ’s proposal to offer “both material rights and privileges such as the traditional security of an equivalent class” benefits investors?
Here, we talk about the benefits that include accessing the same rights as traditional security -voting, dividends, and equity stakes. In Europe, investors get security without the full right, which I look like to handle an exclusive non-token (NFT) without getting the benefits of membership it provides. Imagine the owner of a cryptopunk but not having access to Punkdao and the adventure opportunities available to holders.
NASDAQ is essentially trying to prevent investors from being replaced. This is a major benefit because you are not only getting accessible to a more dynamic -new but limited version of the owner -you still get all the perks. When I think about the potential here, Kapana -excited -think of absolute stocks with 24/7 trading, lower charge, and significantly shorter hours of negotiation.
