Many people like the idea of using their crypto as collateral for a loan, but they are less keen on the security risks associated with taking their assets out of custody to make it happen.
Now, the California-based custodian Anchorage has announced its users will be able to access Bitcoin and crypto-backed loans—without their funds having to move anywhere.
The new Anchorage Financing division is set to over a “seamless user experience” as borrowers will now be able to obtain loans and pay them back in one place.
Citing CipherTrace research that suggests $1.4 billion has been lost to crypto heists this year, Anchorage president and co-founder Diogo Mónica said many institutional investors have been “rightfully” worried about posting collateral outside the security of custody.
Blockchain Capital co-founder and managing partner W. Bradford Stephens said: “Anchorage Financing has resolved the false choice between security and access to leverage. It’s an important milestone in the evolution of institutional crypto infrastructure, and we’re excited to see partnerships like this one, between Anchorage and Silvergate, bringing new sources of capital to the marketplace.”
Lending a hand
To launch the new service, Anchorage has entered into a partnership with the crypto-friendly Silvergate Bank, which can fund loans and process repayments 24 hours a day, seven days a week.
The platform also offers a price monitoring system that automatically alerts borrowers whenever the value of their collateral approaches pre-established thresholds, preventing their positions from being liquidated. Meanwhile, live tracking means collateral coverage ratios can be monitored in real time.
Mónica added that there are a “wide variety of use cases” for the ecosystem—with hedge funds, market makers, and miners all standing to benefit.
“We’re proud to partner with Silvergate, a leading bank in the crypto space with an established track record in loan underwriting and risk management, on this important step forward for the industry,” he said in a blog post on June 16.
According to Silvergate’s chief executive officer Alan Lane, a substantial number of its institutional investor customers have been asking for greater capital efficiency.
“The integration and work that our collective teams have put into this product is a testament to the conviction we have to offer Bitcoin collateralized loans and serve our customers, while applying the same rigorous underwriting standards that have served us well over the years.”
Anchorage’s foray into Bitcoin-backed loans comes after some turbulent times in the decentralized finance space—some of which helped to underline why a custody-based solution was needed.
Topping the list of unfortunate events was the ETH flash crash in mid-March. Sudden falls in the crypto’s price meant debt worth about $4 million was left under-collateralized at MakerDAO.
The following month, disgruntled borrowers filed a class action lawsuit where they demanded $8.325 million in compensation, alongside $20 million in punitive damages. Court documents claimed the Maker Foundation “misrepresented the actual risks they faced” in the event of a sudden price drop.
The question now is whether Anchorage’s plan to offer real-time alerts on the status of crypto collateral could help prevent a reprise of such incidents.
Updated 9:09 a.m. on July 17, 2020 to add Diogo Mónica’s name to a quote.