In July 2018, New York-based startup BlockFi secured $52M, in a funding round led by Mike Novogratz’s Galaxy Digital Ventures. Thanks to the increased liquidity, the non-bank lender can now loan larger amounts of dollars to individuals and corporations against their Bitcoin and Ether cryptocurrency as collateral. Moreover, since the borrowers don’t have to sell their crypto assets, this form of borrowing doesn’t attract any capital gains tax.
In early 2018, the idea for this ‘fastest’ and ‘most affordable’ crypto-backed loans came to CEO & Co-Founder, Zac Prince, as he tried to secure a second loan from a local bank with his Bitcoin and Ether holdings offered up as collateral. It was the bank’s refusal to acknowledge cryptocurrency as a legitimate financial asset that drove him to launch BlockFi. Today, the startup is operating at a beta stage in 35 U.S States.
Cryptocurrency as Collateral
Applying for a loan can be a stressful process. Even after a mountain of paperwork and stringent credit score review, there’s usually still a long and stressful wait before the jury is out on the loan application.
BlockFi facilitates and extends crypto-backed loans quite efficiently, operating within the United States’ federal and state level regulations. All that the applicants need to do is fill an online form and hit submit. It gets vetted within just a few hours. Once the loan is approved, the user signs the loan agreement and transfers crypto collateral to BlockFi’s secure storage wallet, Gemini. Et voila, the USD loan is transferred to the user’s account on the same day. The borrower needs to pay monthly instalments of only the interest, and then at the end of the 12-year loan period, pay back the principal amount to get their cryptocurrencies back.
BlockFi claims to have the largest geographical coverage in the US. It also promises to deliver one of the best crypto-backed loan interest rates (10-13%), while other crypto-backed rates range between 10% and 20% (compared to 5% to 36% levied by banks). BlockFi also comes with higher credit limits (up to $10M in fiat currency), linked to volume of user-owned crypto assets.
Next comes the matter of hedging against cryptocurrency market volatility and loan default losses. While traditional banks offer upwards of 80% of loan amount in exchange for collateral, BlockFi invested in extensive risk modelling to finalize on a sustainable loan-to-collateral-value (LTV) of 35%. For instance, if a borrower offers up $15,000 in cryptocurrency as collateral, they can avail a maximum of $5,250 as loan from BlockFi. This percentage ensures that borrowers have sufficient chance to recuperate in case of market volatility, and in turn, BlockFi will have fewer loan defaulters to deal with.
Another issue faced by the crypto-based loan industry is repayment enforceability. In case the value of the cryptocurrency falls during the loan period, at 70-80% LTV, borrowers are sent a notification and asked to invest additional collateral or pay-up the difference in USD to re-secure their loan. In case the borrowers do not take the necessary action within the stipulated time, BlockFi will sell enough collateral to bring the loan to a basic 50-70% LTV. Or, in case the borrower defaults in payment, BlockFi can “repossess” the equivalent amount of cryptocurrency. Competing crypto-backed lenders, such as ETHlend, tend to retain all of the posted collateral in case the borrower defaults payment.
BlockFi sets itself apart thanks to its minimal capital cost and scale, which will also help it raise large sums of institutional capital as demand grows. Added advantage stems from its unique risk management lens, strategic regulatory approach, and sound marketing capabilities.
Currently, United States’ Securities and Exchange Commission views cryptocurrency as a security. Having passed regulatory checks, in the cities where it operates, BlockFi delivers more competitive offerings to potential crypto borrowers in the safest possible manner.
Top Secret Master Plan
If all goes according to BlockFi’s Top Secret plan (which ironically is clearly outlined in their public blog), the startup expects to scale the heights of crypto financial product success. Prince believes that crypto assets, being ‘natively digital and global by design’, create more innovative and lending opportunities than ever before.
Firstly, it aims to become the leading USD lender in the crypto asset market by supporting more cryptocurrencies and securing more lending licenses in new geographies such as Mexico, India, and parts of South America. Next, they will expand their offerings to include low-cost credit in global markets. Then finally, they will map customer needs and accordingly diversify into other financial products such as fixed-income, debt investments, and credit cards.
BlockFi realizes that they are sitting on a gold mine, especially with the capitalization of all crypto assets rising from $10B to $400B+ in a year. Therefore, the startup’s end goal seems to be to make crypto-backed financial products a mainstream concept in the years to come.