Borrow, lending and leverage in the digital assets

Publication:

There is already a market for lending and borrowing in cryptocurrencies such as Bitcoin and Ethereum where the cryptocurrencies are used as collateral and the loans are either in fiat or cryptocurrencies.

Markets

Markets

The size of market is small with $680m in Decentralised platforms and the Centralised platforms taking the bigger share of the $5 billion market. Both markets are primarily aimed at the retail markets, and for many the lack of credit checking, which is not required in a collateralised lending market is a big draw.

securities

Markets

There is a nascent market of Tokenised Securities, with issuance of debt and equity like tokens, and it is worth considering how these instruments will be traded. A standard transaction on the blockchain involves the exchange of value, say between a stablecoin and a tokenised security. This instant settlement mitigates any counterparty risk, but in an institutional setting would be very capital intensive as each trade is settled for the full amount.

innovation

Innovation

When looking at exchanging cashflows, netting transactions or leverage, there are opportunities in the DLT space as it is open for innovation and there are several ways to bring the changes. There has been some experimentation in this space, with PoCs in the Repo area to facilitate trading, settlement and reduce counterparty risk. A first mover advantage in creating the market infrastructure would not only change the way trading is done, but also helps steer standards badly needed in the digital assets market.

Custodigit has written a detailed report assessing what is currently in place, how it works, and importantly includes a section on how the themes of borrowing, lending and leverage may work in the DLT environment.

You have any further questions?

To get a copy of the report and discuss the various options, and opportunities: Please do not hesitate to contact us.

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