Bitcoin-backed loans continue market expansion through 2022 | Denton
Already a multibillion-dollar industry backed by a trillion-dollar asset class, Bitcoin-backed lending and other collateralized lending arrangements involving crypto assets continue to grow in variety, scope, and access. , and provide borrowers with access to capital which, like traditional loans, can be used to finance businesses, homes, cars and other personal assets. For example, Toronto-based lending platform Ledn closed 2021 by completing its Series B funding and estimated that it will generate over C$100 million in Bitcoin-backed mortgages in the first quarter of 2022.
This overview discusses secured crypto lending, its benefits, and key considerations for borrowers and lenders.
What is Secured Crypto Loan?
Secured crypto loans refer to agreements in which a borrower pledges crypto assets as collateral for a loan, often in the form of fiat currency. Secured crypto loans can be for real estate (mortgages), car loans, personal property, or other business or personal purposes. In most secured crypto loan agreements, loan repayment will be in fiat, as opposed to digital currency, but either is possible and offered by various crypto lenders. If a borrower defaults on a loan or breaches a material loan provision, the lender will generally have the contractual and operational ability to use the pledged crypto assets to settle amounts owed to it under the loan. The terms of the loan, including repayment schedules, interest rates, repayment currency and borrower restrictions, will be set out in a loan agreement, which will be backed by general security agreements and pledges of the crypto assets securing the loans. .
The crypto lending market, like the blockchain and digital asset industry as a whole, continues to evolve rapidly but is represented by a diverse group of lenders and borrowers. There are many lenders – online and otherwise – that allow borrowers to obtain loans against cryptocurrencies, including some platforms that also make it easy to buy or trade crypto assets – see our previous article for those. securities law considerations applicable to crypto asset trading platforms.1. Interest rates and other terms offered by lenders can vary widely from platform to platform and depend on various factors, including the type of cryptocurrency used as collateral for the loan. In addition to interest rates, borrowers will want to consider the reliability of the lender and the platform to ensure collateral will be returned when the loan is repaid. The loan can also take the form of a repurchase agreement whereby the borrower sells the crypto assets to the lender with an agreement to buy back the collateral at a specified time and price.
Benefits of Crypto Loan (Secure)
One of the main drivers for the growth of the crypto lending market has been the desire of borrowers to obtain liquidity by leveraging the value accumulated and stored in digital assets without selling those digital assets. Many borrowers will pledge digital assets which, if sold, would be subject to capital gains; Obtaining a (secured) crypto loan allows the borrower to obtain cash without incurring tax liability. A similar reasoning applies to borrowers who want liquidity but also believe that the value of the pledged crypto assets will increase over time. Some borrowers may also be eligible to deduct interest payments on crypto loans paid in fiat currency, providing another opportunity for such borrowers to benefit from the value stored in digital assets. Another factor driving the growth of the crypto loan market is that certain types of secured crypto loans are often not subject to credit checks, making them a potential source of capital for a wide range of borrowers. Settlement of secured crypto loans depends on the nature of the collateral taken by the lender, but can be accomplished quickly, a key advantage for borrowers and lenders over traditional secured loan agreements in terms of speed, transaction costs and efficiency.
As with traditional secured loan agreements, lenders benefit from the convenience provided by taking collateral on digital assets, many of which can be liquidated against fiat currency with minimal cost and administrative fees if the crypto assets securing the loan have an active and liquid market.
Key Risks and Considerations
An important consideration for borrowers and lenders with respect to secured crypto loans will be the process for granting or taking collateral on digital assets and determining whether the processes applicable to securing other “intangible” assets s apply to crypto assets and, if so, under what circumstances. Lenders and borrowers should consult legal counsel when preparing registrations against crypto or other intangibles to avoid errors and minimize risk.
As with traditional secured loan agreements, crypto loan agreements may (i) involve due diligence on the part of the lender regarding the borrower and their ability to repay the loan, and (ii) impose restrictions on the ability to the borrower to use the collateral during the term of the loan. Often, borrowers will not be able to sell or transfer collateral and lenders will benefit from mechanisms that allow them to control digital assets (or the accounts in which digital assets are held) in the event of default under the to lend. These agreements often resemble traditional deposit account control agreements or escrow account agreements.
Another key consideration for borrowers and lenders in secured loan agreements is the concept of loan to value (LTV) ratio, which is the ratio of collateral value to loan value. If the value of the collateral falls below a prescribed threshold, the borrower will generally have a period of time to pledge additional collateral to secure the loan. If the borrower does not pledge the additional security within the required time, the borrower may be subject to a margin call and the lender may be able to enforce its security. Given the price volatility of many crypto assets, borrowers and lenders should be aware of and carefully negotiate loan agreement provisions relating to the LTV ratio.
Lenders and borrowers should also consider whether crypto loan agreements give rise to securities law issues, including the transfer of securities, or because the execution of security involves the transfer of crypto assets that are securities, or because the crypto loan itself is a security. As noted in our previous article, which outlined considerations for Canadian crypto lending platforms, some crypto lending offerings have undergone regulatory review and have been subject to enforcement action at United States.2 and Canada.
As we begin 2022, Bitcoin-backed loans and other secured lending arrangements involving crypto assets continue to be an ever-growing source of liquidity for borrowers and crypto investors who want to stay invested in crypto markets while accessing cash otherwise stored in digital assets which may also be subject to a significant tax burden. Similarly, lenders have issued loans backed by digital collateral, recognizing the potential efficiency and simplicity of liquidating digital assets for fiat currency. These loans and arrangements raise a number of legal issues, including how and how security will be perfected, covenants and other restrictions applicable to borrowers, and mechanisms for protecting digital assets and taking possession in the event of default. . Crypto lending platforms operating in Canada should take into account securities law considerations applicable to the lending of crypto-assets and regulations applicable to platforms that enable such activity, particularly in light of the increased regulatory scrutiny of crypto lending activities in and around the US. the world.
1 MTN: Canadian Securities Administrators and IIROC Present New Draft Regulatory Approach for Crypto-Asset Trading Platforms
2 MTN: Developments in Securities Regulation in the United States Provide Key Considerations for Crypto Lending Platforms in Canada