A new crypto lender, Nexo, will launch Monday in a market where existing participants have already withstood trial by fire.
Such lenders extend credit to those who want to own digital currency, such as bitcoin and ether, and hold onto it long-term while investing it in real estate and elsewhere. But crypto lenders have been severely tested of late as digital currency prices dropped about 70% between December and February.
Following is a deeper look at those existing players coped with the crisis — and how a new player intends to break in.
The team behind Switzerland-based Nexo runs a consumer lending operation called Credissimo that has made more than a million loans to consumers of up to $2,000 in Europe.
“This is not a startup. This is a team that has a successful track record for over 10 years extending over $120 million in credit,” said co-founder Antoni Trenchev.
The group recently raised $50 million for Nexo, its crypto-lending venture. All money will be loaned out to so-called holders, or those who intend to hold digital currency long-term. (The term comes from a misspelling of "hold" on a Reddit post.)
Asked if the company is offering crypto loans in the U.S., Trenchev said: “Crypto is borderless. We will immediately cover much of the world. We’ll start in Europe, but within a month, we expect to hit the U.S. market.”
Nexo will issue loans in the U.S. through a partnership with an as-yet-unnamed banking-as-a-service institution. The company is also looking to acquire a smaller Federal Deposit Insurance Corp.-insured bank, which would allow it to take in retail deposits.
“The goal is ultimately, down the line, to be fully licensed as a bank,” Trenchev said.
Nexo loans will start at around $10,000 to $15,000 and have interest rates of around 16%. Nexo has already received requests for loans in excess of $1 billion, so the company is talking to investors about obtaining additional funding. To brace for digital currency volatility, Nexo will maintain loan-to-value ratios of around 50%, so someone who wants to borrow $10,000 would have to deposit $20,000 in bitcoin or ether.
“This is the first buffer and protection for both the company and for the customer against overleveraging and being put in a position where they have to repay part of the loan or get some of their collateral liquidated,” when the value of the cryptocurrency falls, Trenchev said.
Nexo is also hedging against digital currency price volatility. It has developed a model that monitors price changes on all cryptocurrency exchanges.
“If you look at the historic volatility of the crypto space, it still is very volatile but the trend is downward,” Trenchev said. “In a few years, we believe volatility will come down and you’ll see CME, CBOE and the traditional exchanges developing futures and ETFs. As bitcoin and other cryptocurrencies become more accepted throughout the financial space and you have more instruments to handle volatility, this is bound to go down, which is good for almost everybody.”
When customers take out a loan, they transfer digital currency to BitGo, a custodian that provides multisignature wallets, to serve as collateral. Such wallets allow borrower and lender to each have a key to the vault in which the digital currency is stored. If something goes awry, the lender can swoop in and grab its collateral.
The Nexo borrower can receive the credit in the form of either a Nexo credit card or a same- or next-day bank transfer.
“We view it is as more of a credit line,” Trenchev said. “You can deposit $50,000 worth of bitcoin and get the credit line of $25,000 and you spend it as you please. You might borrow as little as $1,000.”
If the value of the underlying digital currency goes up, the credit line automatically increases.
Nexo has outsourced identity verification, know-your-customer and anti-money-laundering checks to Onfido, which is also used by the CME, TransferWise, CoinBase and others. The company does not pull credit reports.
“This is good for us because our wallet is insured, but it’s also good for the client because it doesn’t make any imprint on their credit score,” Trenchev said. “So they can borrow without worrying about that part.”
If a borrower stops paying on a loan, Nexo will dip into the shared wallet and take enough to cover the loan and the interest that accrued. Any leftover funds will be returned to the customer.
“It’s not like a repo agreement, it’s more like a mortgage,” Trenchev said.
Denver-based Salt Lending, which started crypto lending earlier this year, has made just under $40 million in loans and has had no losses, according to co-founder Blake Cohen.
On his LinkedIn page, Cohen refers to himself The Blockchain Cowboy. This is what his partners call him because he sometimes wears bolo ties, cowboy boots and Western belt buckles, “which is my birthright being born and raised in Denver,” Cohen said. “It is tongue in cheek.”
Salt offers three 36-month loans with loan-to-value ratios of 20%, 40% and 60%. The rates range from the teens to the low 20s. Identity verification and KYC/AML checks are done by Jumio.
When the prices of bitcoin and ether fell in the beginning of the year, Salt issued many margin calls and most borrowers met those margin calls quickly.
In the automated margin calls set up by Salt and other crypto lenders, when a loan-to-value ratio reaches a certain threshold, say 80%, the customer will receive a text, an email and a phone call instructing them how much more collateral they need to contribute to their collateral account or how much they need to pay on the loan to avoid liquidation. Salt then has the sooner of 48 hours or the next trigger, say a loan to value ratio of 90%, to take action.
“The beauty of cryptocurrency is that in order to contribute more collateral, it’s a swipe of your finger on your phone that enables you to send more collateral to that collateral wallet address,” Cohen said. “So it’s very fast and efficient to meet those margin calls.”
In two cases, Salt had “liquidation events” where it sold a portion of the collateral to return the loans to their original loan-to-value ratio. Some borrowers elected to prepay a loan rather than meet margin calls or risk being liquidated.
“We had a real opportunity to demonstrate that our program works and we can protect the principal,” Cohen said. “So far, so good.”
Eventually he thinks people will use their entire crypto portfolios as collateral and LTV ratios will be lower across the board. Salt has not changed anything about its loans as a result of the drop in cryptocurrency prices.
“As long as there’s an angle to the decline, we can feel comfortable that we can liquidate that collateral when needed,” Cohen said.
Salt lends out its own capital. It’s pursuing more capital to apply to its loans. It’s also applying for lending licenses in all 50 states and other countries. “When those two things come together, we’ll be able to speed up the lending process,” Cohen said.
Unchained Capital, which publicly launched in November, is originating “single-digit million dollars of loans per month,” according to CEO Joe Kelly. The typical loan size is $120,000; the average interest rate is 12%.
“Things have been going well,” Kelly said. “February was one of our slower months. We’re coming out of a trough there, but things have picked up and it continues to be brisk.”
Between 30% and 40% of borrowers use the loans to invest in income-generating real estate, like a vacation home or commercial property, he said. Like Nexo’s, Unchained’s loan-to-value ratio is 50%.
“That’s been sufficient through what was a 70% downturn from December to February,” Kelly said. The company margin-called 90% of its loan portfolio, and 80% of those margin calls came back with more collateral within eight hours.
“They’re a very responsive client base,” Kelly said. “They’re taking out a loan like that because they don’t want to sell their bitcoin, so they’re very incented to respond to things like margin calls.”
Unchained Capital operates in 35 states. In March, it received a California Financial Lender License. Because most state lending laws are drafted to protect consumers against predatory lending, usually small loans with high interest rates, Unchained is in a safe harbor in many states. But California and a few other states require a license to conduct any kind of lending activity, Kelly said. “We’re thankful we got the license.”
Unchained does its own identity, KYC and AML checks using a process it created with a third- party consultant. As part of the process, people have to provide their income, asset holdings and the sources of their digital assets. About 1% of applicants don’t want to share that information and when pressed, they tend to leave, Kelly said.
“Even though bitcoin is a really volatile asset, it’s still one of the best forms of collateral you can find,” Kelly said. “You can receive, store and liquidate it quickly. That’s why new competitors are popping up — 'Oh, bitcoin! That’s cool, I could lend against that.' That will bring interest rates down.”
These companies are all undaunted and bullish about the future of crypto lending.
“The innovation of bitcoin and blockchain and distributed ledger technology is undeniable,” Trenchev said. “Some cyptocurrencies will fail, and some of the crypto-lending projects will fail. But just as out of the ashes of the dot-com bubble Amazon and Google emerged, the next big thing will come out of this.”
Editor at Large Penny Crosman welcomes feedback at firstname.lastname@example.org.