Loans secured against cryptocurrency assets are not new to the digital currency sector, although for Wall Street, where cryptocurrency is considered too risky and volatile, this was the first experience with such collateral. According to Bloomberg, the open line of credit will allow Coinbase to borrow fiat currency, such as the US dollar, by lending its crypto assets as collateral to the bank.
The deal is interesting in its structure as well as its round-the-clock risk management. Since bitcoin’s volatility could make these loans risky for Goldman Sachs if the price of VTC falls too much, Coinbase could be required to increase its collateral. Otherwise, the line of credit would be suspended and the collateral could be liquidated.
“Coinbase’s work with Goldman Sachs is the first step towards recognising cryptocurrency as collateral that strengthens the bridge between the fiat and cryptocurrency economies,” said Coinbase Institutional head Brett Tejpaul.
The dollar value of the loan agreement was not disclosed by the parties, but it is known that the loan was secured by Coinbase assets of 4,487 BTC (about $170 million).
Commenting on the Coinbase and Goldman Sachs loan agreement, Matthew Ballensweig, one of the directors and trading and lending at prime brokerage firm Genesis, said that typically such borrowers are lent between 40% and 60% of the collateral value. Technically, the collateral is held by a qualified custodian, and borrowers receive US dollars from the lender at an agreed interest rate.
Recall that according to Turkish news portal Webrazzi, cryptocurrency exchange Coinbase is finalizing negotiations to buy the Turkish site BtcTurk’s business for $3.2bn.