The rise of cryptocurrency has opened up a number of business opportunities for both investors and lenders. While there are some risks associated with the crypto world, its incredible returns attract traders more intimately compared to other investment tools. After initial hesitation, banks have also started exploring ways to capitalize on this craze.
In India, banks like Kotak Mahindra have started partnering with online exchanges to support crypto payments. Banks in the US have also started looking at ways to use Bitcoin, Ether and other cryptocurrencies as collateral for loans to institutions.
Simply put, crypto-backed retail loans are like 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 as collateral for car or mortgage loans.
While it is unlikely that major banks will get directly involved in crypto trading in the near future, there is nothing stopping them from tapping into the growing crypto investors.
Citing people familiar with the matter, a CoinDesk report named Goldman Sachs, a US multinational investment bank, as the leader of this effort. Goldman Sachs isn’t alone – Silvergate and Signature also announced Bitcoin-backed cash loans earlier this year. Banks are also coming up with tri-party repo-style schemes – a way of borrowing money by selling securities with an agreement to buy them back, involving an outside agent. These efforts could lead to more integrated crypto prime brokerage services in the future.
The move by the banks shows that they are gaining confidence in this new and volatile sector and also that they have the will to make bold decisions. 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 to stimulate economic growth will give banks confidence and speed up the Bitcoin adoption process.