Three people familiar with this new initiative say Goldman Sachs is part ofa few tier-one US banks exploring the use of bitcoins as collateral to receive cash loans from institutions. Unlike most banks, Goldman will not deal in cryptocurrency spot markets but would rather rely on synthetic crypto products, like futures.
By copying tri-party repo arrangements (where they sell securities tothird parties and then agree to purchase them afterwards), banks are seeking ways to follow the same way of not accessing bitcoin. CoinDesk spoke with sources who said that this could lead to more integrated crypto prime brokerage services in the future.
A similar trend occurred on Wall Street, where2.7 trillion dollars asset class was suddenly embraced, although with a more niche product mix. Goldman was trying to get approval for against tri-party repo lending and collateral, according to one party involved. Moreover, if there was a liquidation agent, then all they did was secured borrowing without having to gain access to bitcoin directly.
Several big banks, Goldman Inclusive, have followed the footsteps of crypto banks Signature and Silvergate, both have recently agreed to bitcoin-backed cash loans. One individual from a large institutional trading firm said, “We’ve spoken to around half a dozen big banks regarding bitcoin-backed loans.”
Some are within the next 3 to 6 months while others are farther in the future. Interestingly, some will lend money using their balance sheet. Others will not agree to this.
Under the previous administration, Brian Brooks, the head of the Office of the Comptroller of the Currency (OCC), said bitcoin was also equivalent to cash, therefore banks could accept bitcoin as collateral and keep them safe. Despite this, the US regulatory stances on activities such as borrowing money with Bitcoin as collateral remain complicated.
However, there could be a mix of regulations coming from the Commodity Futures Trading Commission, SEC, or OCC depending on the bank and what is being proposed.
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Crypto providers come on board
Among the potential custodians of these services cited by the banks were Fidelity Digital Assets and Coinbase. A new feature would be added to Coinbase’s Prime product, which offers some solution to institutional financing already.
Coinbase did not respond to a request for comment. Fidelity Digital Assets declined to comment. Several small lenders are also reportedly considering accepting crypto as collateral, along with the big banks. A third source told me non-bulge-bracket banks are also expanding in this area of tri-party lending.
Goldman Sachs eyes Crypto Market as the next huge step
Wall Street heavyweight Goldman Sachs says traditional financial firms will have to pile into the rapidly growing asset class of cryptocurrencies to increase their liquidity in options markets. At a CoinDesk-hosted panel discussion, Goldman’s global head of crypto trading, Andrei Kazantsev, said there was a high demand for derivative-type hedging.
In comparison to more traditional markets such as foreign exchange, or equities, Kazantsev described cryptocurrency derivatives as being at the infancy of their product scope. In the past couple of years, the bitcoin options market has already seen fast growth.
Skew, a subsidiary of Coinbase that tracks data on cryptocurrency derivatives markets reports that the value of an open interest in bitcoin options is about $12 billion as of the latest available data. The market rarely exceeded $2 billion in the first half of 2020.
We should expect new developments from crypto providers in the future. Don’t be surprised if you see your traditional firms accepting bitcoin and other cryptos as collateral.