The craze for cryptocurrency continues to spread as several banks conduct research on Bitcoin-backed loans. Goldman Sachs in particular has highlighted its interest in finding out how Bitcoin can be used as collateral for institutional loans.
In a bid to remain within the legal constraints of crypto currency involvement, Goldman Sachs intends to avoid direct cryptocurrency spot markets. Instead, the tier-one US bank aims to deal with synthetic cryptocurrency products like futures.
Goldman intends to work with third-party agents to help borrowers sell securities, with an understanding to buy them back. These three-party repo-type arrangements are a convenient way for clients to borrow funds. “Goldman was working on getting an approval for lending against collateral and tri-party repo,” said a reliable source. The bank has however declined to comment on the matter.
Goldman Sachs Bitcoin-backed loans
When trusted sources from Goldman spoke to Coindesk, they said that this was an opportunity to establish the groundwork for services in crypto prime brokerage for the days ahead. It also continues the embrace that Wall Street has suddenly gained over an asset class worth $2.7 trillion.
However, the race to get Bitcoin-backed loans isn’t one that Goldman alone is trying to participate in. If anything, this race already has its first two winners, Signature and Silvergate. These two crypto-friendly financial institutions both announced their Bitcoin-backed loans earlier in the year.
“We’ve probably spoken to half a dozen big banks about [Bitcoin-backed loans],” said another source from Goldman. “Some of them are in the next three to six months category and some are further out. What’s interesting is some of these banks will use their own balance sheet to make the loan. Others will syndicate this out.”
Interestingly, these banks are in negotiation with crypto exchanges like Coinbase and other crypto-based organizations like Fidelity Digital Assets. The discussion centers around them serving as the bank’s crypto custodians. Coinbase however declined to respond, while Fidelity Digital Assets did not even respond to the request for a comment.
The Stand Of The US Government On The Use Of Bitcoin As Loan Collateral
The first partial go ahead for Bitcoins to serve as collateral came during the Trump era. During this period, chief Brian Brooks of the Office of the Controller of the Currency (OCC) said Bitcoin is equivalent to fiat, and as such, banks can be its custodians.
The US government, however, has not well defined where it stands on the regulation of such activity. Three bodies in particular are likely to be in consultation when a bank proposes the use of Bitcoin as loan collateral. The first organization is the Securities and Exchange Commission (SEC), the OCC and the Commodity Futures Trading Commission (CFTC).
Accepting crypto as collateral for loans is not a reserve of big banks. Other smaller lenders also appear interested in such possibilities. “Non-bulge-bracket banks are also building in this tri-party lending area,” said a third CoinDesk source. Although this is not a step as huge as a country like El Salvador embracing Bitcoin as the official currency, it is still interesting to watch both major and minor financial players strive to embrace the digital currency.