Andrei Poliakov
CEO
The Rise of Bitcoin-Backed Lending: Navigating Opportunities and Challenges
As 2023 draws to a close, Bitcoin-backed lending is carving out a significant niche in digital finance, buoyed by Bitcoin’s impressive price surge to over 56K CAD (+152% YTD). This increase, fueled by market optimism and key events like the anticipated BlackRock ETF approval and the upcoming 2024 Bitcoin halving, has bolstered investor confidence. This has, in turn, spurred interest in using Bitcoin as collateral, with platforms like FINTRAC-registered APX Lending experiencing a notable uptick in loan applications.
What is Bitcoin-halving?
Bitcoin halving is an event that takes place every four years and which is next scheduled for April 2024. Halving events are an algorithmically driven reduction of the number of new Bitcoins that enter circulation. This reduction increases Bitcoin’s scarcity, and coupled with a growing demand, causes the value of the asset to appreciate in comparison to inflationary assets like fiat currencies. For instance, we saw a huge spike in the price of Bitcoin after the last halving in 2020. Expert predictions, like Pantera Capital’s, forecast Bitcoin reaching around $148,000 USD in 2024.
What is Bitcoin-backed lending?
Bitcoin-backed lending allows borrowers to use their Bitcoin as collateral, offering a practical solution for those needing immediate funds without selling their Bitcoin. This option is ideal for businesses needing capital for expansion or individuals seeking liquidity for daily expenses. By opting for a loan over selling their Bitcoin, borrowers can benefit from any future price appreciation while avoiding potential tax liabilities associated with asset sales. This approach provides immediate liquidity while maintaining investment potential in the appreciating value of Bitcoin.
The business model of Bitcoin-backed lending, while appearing straightforward, requires some considerations, especially in the context of overcollateralized loans. In these loans, borrowers provide more Bitcoin than the actual loan value. This extra collateral offers lenders a safeguard to protect against market volatility, allowing them to request additional collateral or partial loan repayment if Bitcoin’s value declines. It also affords them the opportunity to liquidate the collateral before a potential default, thereby reducing risk. However, using Bitcoin as collateral brings its own set of challenges, including intricate technical and legal aspects like collateral management, perfection, custody, and liquidation. To navigate these complexities, crypto-backed lenders develop proprietary technology and procedures for efficiently monitoring, managing, and, when necessary, liquidating collateral.
One of the most challenging aspects of Bitcoin-backed lending is the legal intricacies involved in securing and perfecting the crypto collateral. The Personal Property Security Act (PPSA) in Canada, for instance, does not currently categorize crypto assets explicitly, creating a legal gray area for lenders and borrowers alike. The issue of ‘attachment’ and ‘perfection,’ essential for ensuring a lender’s rights against the collateral, becomes complicated when dealing with digital assets that don’t fit neatly into traditional legal frameworks. To address some of these concerns, lenders typically take control of Bitcoin collateral – the borrower physically sends the Bitcoin collateral into a cryptocurrency wallet that is controlled by the lender. This provides a degree of protection to the lender in cases of default or liquidation.
Another integral part of Bitcoin-backed lending is the role of crypto custodians. These custodians play a crucial role in safeguarding digital assets collateral, mitigating risks associated with hacking or theft. Trustworthy qualified custodians that offer substantive insurance are essential in this emerging market.
The Future of Bitcoin-Backed Lending
The future of Bitcoin-backed lending is bright, signaling a transformative shift in the digital finance landscape. This innovative approach, melding the traditional lending sphere with the burgeoning cryptocurrency market, is more than just a trend – it’s a forward-looking movement that aligns with the evolving nature of global finance. Looking ahead, Bitcoin-backed lending is poised to become an integral part of the financial fabric, offering flexible, inclusive solutions, and contributing to the broader evolution of decentralized finance. As this sector continues to evolve, its impact on lending practices and investment strategies promises to be profound, redefining our approach to digital assets and their role in our financial future.
About the Author
Andrei Poliakov is a Canadian blockchain entrepreneur and in 2022 was named one of the “50 Most Influential Canadians in Crypto and Blockchain“. In 2017 Andrei co-founded Coinberry – one of Canada’s largest licensed crypto brokers. Under his leadership, Coinberry became the first crypto start-up to be registered with the OSC and the CSA in Canada. Coinberry was acquired by Wonderfi Technologies (TSX: WNDR) in 2022.
In 2023, Andrei launched APX Lending (www.apxlending.com), a compliant, safe, and secure Bitcoin-backed lending platform. Andrei helps others understand trends, gain technical insights, and overcome common misunderstandings about the blockchain industry. He believes in pushing the boundaries of the status quo and is passionate about fueling blockchain adoption through education.
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