Leading crypto exchange Coinbase, which started trading services in India last month, has taken out a loan from Goldman Sachs using its Bitcoin assets as collateral to strengthen ties between crypto and traditional banking, reported Bloomberg. The amount of the loan has not been made public, but the collateral for it was based on a portion of Coinbase’s Bitcoin Holdings. As of 2021, Coinbase owns cryptos worth $566 million, which includes more than $183 million worth of Bitcoins.
"Coinbase’s work with Goldman is a first step in the recognition of crypto as collateral which deepens the bridge between the fiat and crypto economies," Brett Tejpaul, head of Coinbase Institutional told Bloomberg. Goldman Sachs’ loan terms include 24-hour risk management.
Offering loans on cryptos as collateral is a common practice in the crypto industry. According to Chainalsyis, the amount of crypto collateral locked in the decentralized finance (Defi) economy was $275 million in 2019. It has grown to $14 billion in 2021.
However, giving loans on crypto by an established bank is a first. Goldman Sachs' loan to Coinbase with Bitcoin as collateral is a huge boost for the crypto industry, which has largely been ignored by the traditional banking and finance sector (BFSI) due to the high volatility in the prices of cryptos.
Last November, the value of Bitcoin soared to $69,000 and within months again dropped to $38,964. The value of some of these new cryptos, such as dogecoin, soared by 8,300% in 2021, exceeding even that of bitcoin.
Many in the BFSI sector see cryptos as a threat to traditional banking. It's one of the reasons why central banks in various countries including India are developing their digital currencies called CBDCs.
However, with the growing investor interest and value of cryptos, many banks have started exploring ways to dabble in them.
"Several global banks are offering digital asset custody services. Some international banks have started to look at trading crypto-asset futures and non-deliverable forwards, and offering wealth management clients crypto-asset investments," Jon Cunliffe, Deputy Governor of the Bank of England for Financial Stability said in a blog post.
Crypto prime brokerage Genesis is in talks with crypto-friendly banks such as Silvergate Bank and Signature Bank to structure similar loans backed by crypto assets, according to the Bloomberg report.