More investment firms are giving bitcoin investors an extra avenue to raise cash from their digital assets by accepting cryptocurrencies as collateral for US dollar loans for a fee.
Diginex, a Nasdaq-listed fintech firm which runs a cryptocurrency exchange that is licensed in Singapore, plans to offer cryptocurrency borrowing and lending services to its clients from next month to capture demand from institutional traders. The service could appeal to investors with a bearish view on the US currency, chief executive Richard Byworth said.
"An investor trading crypto-derivatives on our platform can borrow US dollar from us against bitcoin, which is put into our custody facility as collateral," Byworth said in Hong Kong. "If one sees the dollar value weakening against the bitcoin, that could be a better way to spend the fiat currency today than at a future date."
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The Dollar Index has dropped 7.4 per cent against major peers over the past 12 months, according to Bloomberg data. The yuan, for example, strengthened 8.4 per cent against the US currency in the same period. Bitcoin, meanwhile, has more than quintupled at the same time, lifting its capitalisation above US biggest bank JPMorgan Chase.
Nasdaq-listed Diginex chief executive Richard Byworth sees multiple use cases for borrowing against bitcoin. Photo: K. Y. Cheng alt=Nasdaq-listed Diginex chief executive Richard Byworth sees multiple use cases for borrowing against bitcoin. Photo: K. Y. Cheng
With almost 90 per cent of its 21 million coins already mined, Wall Street banks and US corporates are increasingly dabbling into the currency as evident by Tesla's recent US$1.5 billion bet on bitcoin.
Diginex also allows traders to borrow bitcoin for short-selling purposes as part of a hedging strategy. The lender, who could be another trader on Diginex's platform, gets paid a fee. Byworth expects the first such trade to be transacted next month.
To be sure, offering loans against cryptocurrencies is not new. US investment firm Equities First headquartered in Indianapolis have been offering a cryptocurrency-lending service in Hong Kong as well for the past few years to borrowers with stock holdings for financing purposes.
In recent years, however, more US financial institutions have jumped onto the bandwagon. Fidelity Digital Assets, a unit under global asset manager Fidelity International, started offering a cryptocurrency lending service in December.
The array of offerings has also come amid Hong Kong's government proposed rules to require all cryptocurrency exchanges to get licensed by the Securities and Futures Commission (SFC), in its bid to put them under the city's anti-money-laundering scrutiny. It remains unclear whether custodians, or lending against bitcoin, will be regulated under the law.
Fidelity Digital Assets' foray into bitcoin lending is done through a partnership with Blockfi, a US cryptocurrency lending platform.
According to Blockfi's website, it offers US dollar loans against bitcoin at a loan-to-value ratio of 50 per cent. One bitcoin pledged as collateral could back up a US$22,600 loan for a 12-month term. Its annual percentage loan rate can be "as low as 4.5 per cent." Bitcoin traded at about US$45,300 on Friday.
"We continue to see demand for increased capital efficiency from institutions that maintain long bitcoin positions," said Christine Sandler, head of sales and marketing at Fidelity Digital Assets in a press release. "Our customers seeking that efficiency can access more opportunity with the capital that they trust us to keep safe".
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.