Goldman Sachs and other Wall Street Banks Explore Bitcoin-Backed Loans

2021 has been a big year for cryptocurrencies, as the total market capitalization went past the $3 trillion mark, even if for a little while. This is an indication that cryptocurrencies are certainly not going anywhere and are going to be a force to be reckoned with in the future as well. Another indication of the widespread adoption of these cryptocurrencies is the latest cryptocurrency news that a number of one-tier banks in the United States are considering how to use Bitcoin, the world’s first cryptocurrency, as collateral when giving cash loans to institutions. According to some people who are familiar with the plans, these banks also include the prominent name of Goldman Sachs.

Banks like Goldman Sachs will not move towards the crypto spot markets, but are taking an interest in synthetic cryptocurrency products like futures. Similar to tri-party repo arrangement, banks are looking for using the same path to not touch bitcoin and go with synthetic products. This kind of arrangement is a way of borrowing funds where securities are sold with an agreement to buy them again and a third-party agent is involved. According to sources, this opportunity would help in laying down the groundwork for better and improved crypto prime brokerage services down the line.

Moreover, it is also the continuation of the relatively sudden embrace of WallStreet of the crypto asset class, which is worth $2.7 trillion, but only with some niche products and not cryptocurrencies directly. One of the people close to the matter said that Goldman is making an effort to get approval for trip-party repo and lending against collateral. In addition, if they use a liquidation agent, then it means that bitcoin would never have to be a part of their balance sheet because all they would be doing is engaging in secured lending. Goldman Sachs has not commented on the matter as yet.

It is important to note that Goldman Sachs is not the only bank making moves, as there are a handful of others that are also following the trail of crypto-friendly banks, such as Signature and Silvergate. Earlier this year, both of these had launched bitcoin-backed loans for their clients. An individual belonging to a large institutional firm said that almost half a dozen banks are contemplating the idea of bitcoin-backed loans. A few of them are planning to launch them in the next two to three months, while others are a while away.

The most interesting thing to note is that some of these banks will syndicate the loan, while others intend to use their own balance sheet for this purpose. The previous administration of the United States had given a partial green light to the ideas of banks accepting collateral in the form of bitcoin. Brian Brooks, the chief of the Office of the Comptroller of Currency (OCC) had said that the leading crypto was the equivalent of cash, which meant that banks could have the responsibility of safekeeping it. But, it shouldn’t be forgotten that the US has a rather complicated regulatory stance on such activities.

It depends on the bank and their proposal because regulation can come from the Securities and Exchange Commission (SEC), the OCC and the Commodity Futures Trading Commission (CFTC). The banks were also in discussion with crypto exchanges like Coinbase as potential custodians as well as Fidelity Digital Assets. Coinbase already has a Prime product that comprises of institutional financing solutions, but this would be an addition. However, neither Coinbase nor Fidelity Digital Assets were willing to comment on the matter. Along with big banks, a number of smaller banks also said that they were thinking of ways to accept crypto as collateral. A third person said that this tri-party lending area was also under consideration by non-bulge-bracket banks because it has a lot of potential, so they were thinking about building it. This would be a big move for the banks and the crypto market as well.