Banking and investment giant Goldman Sachs has issued its first cryptocurrency-backed cash loan, signaling the entry of a traditional financial institution into a field that has traditionally been the domain of decentralized finance, or Challenge.
Goldman’s loan was backed by bitcoin, and while details weren’t revealed, the company told CoinDesk that “the interesting coin for us was the structure and 24/7 risk management. over 7 and 365 days”.
The loan differs from DeFi loans in several notable ways. On the one hand, Goldman gave the borrower fiat currency rather than dollar-pegged stablecoins used by DeFi lending protocols like Maker, Aave, and Compound, which offer 125%-backed stablecoin lending at 150% crypto collateral locked in smart contracts.
See also: PYMNTS DeFi Series: What is DeFi?
On the other hand, the purpose of cryptocurrencies from Bitcoin was to eliminate intermediaries from financial transactions – the opposite of borrowing money from the Goldman Sachs bank.
And this isn’t the first sign that traditional finance, or TradFi, firms are overcoming their mistrust of crypto.
Goldman Sachs has just announced plans to ramp up its crypto trading business and banks like JPMorgan and Citibank are offering some clients crypto investment products. This year, Blackrock revealed plans to offer crypto trading services and this week launched an exchange-traded fund focused on blockchain and crypto-focused companies like Coinbase.
And on April 28, investment giant Apollo Global Management announced that it had hired a senior crypto executive outside of JP Morgan Chase to create a new digital asset arm.
Also Read: Apollo Taps JPMorgan Vet Christine Moy in Digital Asset Project
TradFi follows the money
That said, traditional finance is increasingly interested in DeFi, both because the technology can reduce expenses and because there is money to be made. There is currently around $75 billion locked up in various DeFi projects, according to DeFi Pulse. That’s up from $9.7 billion two years ago.
And while that’s down from the $100 billion in total value locked, or TVL in November, it’s a number that, with the crypto’s $1.7 trillion market cap, is just too much. important so that TradFi companies ignore it.
Along with investing in the Automated Market Maker (AMM) liquidity pools that power decentralized exchanges (DEXs), crypto lending is the bread and butter of DeFi. But while DeFi loans can technically be used for anything, the vast majority is funneled back into other DeFi investments – yield farming and liquidity mining.
See also: PYMNTS DeFi Series: What is Yield Farming and Liquidity Mining?
DeFi borrowing can be risky because even with significant overcollateralization, crypto volatility regularly causes margin calls.
TradFi vs. CeFi vs. DeFi
Goldman isn’t the only traditional finance company to offer bitcoin-backed loans — Fidelity Digital Assets began offering cash loans for crypto collateral in late 2020 and has worked with debt-focused Silvergate Bank. cryptography and a number of crypto lending FinTechs like Nexo, Celsuis, and BlockFi known as centralized finance, or CeFi, in the industry.
But CeFi was hit hard by the Securities and Exchange Commission in February, when BlockFi agreed to a $100 million fine when the agency said its interest-bearing loan accounts violated securities law. This was after the SEC threatened Coinbase, the Nasdaq-listed cryptocurrency exchange, to halt plans for Coinbase Lend, leading to a widespread belief that many other CeFi lenders are negotiating deals. .
Read more: The SEC’s new Top Cop: No free pass for unregistered crypto lenders
Still, a number of these CeFi companies are in the mortgage business, which means they offer loans for more traditional purposes — and in traditional dollars — than most DeFi lenders.
Crypto-friendly Signature Bank announced last week on its earnings call that it intends to compete with Silvergate Bank by offering crypto loans.