Hello and welcome to the FT Cryptofinance newsletter
Lending is back in vogue in the crypto market.
More than two years have passed since the credit crisis triggered by the collapse of terra network swept through the crypto market, taking down companies such as Voyager, Celsius Network and BlockFi, and with them the industry’s reputation among smaller investors.
But there are signs that this corner of the market is beginning to take off once more with bitcoin up more than 50 per cent this year despite a patchy past three months.
Last weekend, Howard Lutnick, the hard-charging boss of US brokerage Cantor Fitzgerald, told the audience at a Nashville conference attended by Donald Trump that he planned to launch a bitcoin financing business. It would lend an initial $2bn, rising in further $2bn tranches if the demand was there.
Ledn, a lender that is serving former Celsius borrowers, said it had processed more than $1.16bn in digital asset loans in the first half of the year.
“Crypto credit conditions often track crypto enthusiasm and crypto pricing . . . and when people are more optimistic, they want to use more leverage,” said Mike Novogratz, chief executive of crypto financial services company Galaxy Digital on an earnings call this week.
But this rebound in lending is markedly different from the pitch that the likes of Celsius and Voyager were making before their demise.
Two closely related factors have brought the issue of credit and lending back into the market: the arrival of US spot bitcoin exchange traded funds in January and the subsequent rally in the bitcoin price.
The bitcoin ETFs have meant issuers and their agents need to buy and sell vast quantities of bitcoin to ensure the value of the ETF matches the value of the asset it is supposed to track. Credit and capital remain weak spots for the crypto market: trades must be pre-funded, rapidly consuming available capital. Ledn said that $969mn of its loans were to institutional investors, of which “several hundred million” were to ETF market makers.
Moreover, there is a desire among crypto holders to see their assets put to work, while also waiting for the number to go up.
“We have plenty of people that have created a bunch of crypto wealth that don’t want to lose their crypto and so will borrow dollars against crypto,” said Novogratz.
Holders of ether, the second-largest cryptocurrency, can earn a return by putting it to use in the process of validating transactions on the ethereum network. Bitcoin cannot be staked but can be put to use in other ways.
“Borrowing against digital assets is typically a non-taxable event, which may offer a significant tax advantage over selling digital assets in many jurisdictions,” said Ledn.
The mix of lending, credit and tax services means what is emerging among market intermediaries is a crypto version of prime brokerage, a huge driver of profits for big Wall Street banks.
A prime broker typically arranges services for hedge funds, high-speed traders and family offices such as extending credit, financing trades, storing assets or even trading on behalf of customers.
Investors trading crypto markets have few of these efficiencies. There are few dedicated crypto brokers in the market and few have the full suite available. Cantor appears to be offering a solution as a prime broker, saying it would work with a few bitcoin custodians. And as one of the US’s primary dealers in Treasuries, it is comfortable handling the high volumes beyond the likes of Celsius.
Lutnick boasted about handling $10bn in tether redemptions in 2022 “as no big deal for us” because Cantor dealt with trillions of dollars of Treasuries.
The biggest problem is the size of the balance sheet available from some of the smaller crypto prime brokers, such as Hidden Road and FalconX. Galaxy said its GalaxyOne prime brokerage was servicing assets with a market value of more than $1.3bn.
Mainstream banks are prevented by regulation from diving headlong into crypto. Global rules such as Basel III and the US’s controversial SAB 121 standards have made it economically very difficult for banks to hold crypto on behalf of clients in any sizeable amount. However, that’s not an issue for companies that are not regulated like banks.
Novogratz said he hoped the prime business when launched would “turbocharge” his lending business “so I would hope that 12 months from now, 24 months from now, it’s one of our biggest businesses”.
After the 2008 financial crisis, regulations constrained banks from lending from their own balance sheets and trading their own capital as before. As the buy side grew and hedge funds and assets managers mushroomed in size, independent trading companies such as Citadel Securities and Jane Street thrived as intermediaries.
Crypto may or may not grow in acceptance to the point where the world’s largest asset managers and sovereign wealth funds devote a few per cent of their portfolio to bitcoin and ether. But if it does, the big Wall Street banks may find it difficult to dislodge those with a head start.
What’s your take? Email me at philip.stafford@ft.com
Weekly highlights
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Grayscale spun off 10 per cent of the existing assets in its bitcoin ETF, about $1.8bn out of $18bn, into a “mini” ETF. It is designed to compete on price after the main fund had consistently seen outflows since it converted from a trust in January. The “mini” ETF will have the cheapest fee on the market while its big brother has the most expensive. Grayscale launched a mini ether ETF last month and the inflows have helped offset the notable outflows that Grayscale’s ether ETF has had too.
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The US arrested and charged Nader Al-Naji, a former Princeton graduate known as “Diamondhands”, with wire fraud and civil securities violations after he raised $257mn from the unregistered offers and sales of BTCLT, a crypto token linked to social media site BitClout. The Securities and Exchange Commission complaint alleges that Al-Naji spent more than $7mn of investors’ money on items such as rental payments for a Beverly Hills mansion and cash gifts of at least $2.9mn to family members.
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Bybit, the cryptocurrency exchange, said it would leave France later this month “in light of recent regulatory developments from the French regulator”. The AMF, the French watchdog, blacklisted the company in May for non-compliance with existing French regulations.
Soundbite of the week
Donald Trump’s speech at the bitcoin conference in Nashville last weekend gave bitcoiners plenty to feast on. And as my colleague Jemima Kelly has observed, Trump can have a way with words. He ended his Nashville speech thus:
“Have a good time with your bitcoin and your crypto and everything else you’re playing with.”
Cryptofinance is edited by Laurence Fletcher. To view previous editions of the newsletter click here
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