Where Credit’s Due Ep. 5: Crypto lending with Genesis and BlockFi

Many crypto HODL-ers out there don’t plan on spending it or cashing out, and now they can earn pretty high yields on their crypto assets, which baffle many folks in traditional finance. 

This nascent market draws skepticism, but also many passionate people looking to innovate.

My guests today are Matt Ballensweig, managing director and co-head of trading and lending at Genesis, and Shannon Allmon, General Manager of Retail at BlockFi. 

Genesis and BlockFi are both some of the biggest centralized lending platforms out there, so tune in to find out how the crypto market evolved into offering retail and institutional investors the possibility to lend with crypto assets as collateral, how they’re able to give out high yields on deposit accounts and what needs to happen regulatory-wise in order to gain more trust with the wider finance community.

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The following excerpts were edited for clarity.

What is your overview of the market and how your company is positioned currently within the ecosystem?

Matt Ballensweig: Genesis is one of the largest institutional lenders in the crypto market. We've been around since 2014-2015 when we solely focused on Bitcoin trading. We actually launched our lending business in early 2018 to create a two sided market on both the coin and cash side of the institutional lending flow.

We've been super active in the market since we launched the business in 2018, and we're now about a $12 billion active loan portfolio. We lend out to some of the largest hedge funds, trading firms, market makers and investors in the crypto market, and at the same time, we'll go and borrow and help other depositors generate yields that are on the supply side.

The market has come a really long way over the last five years, it's a tremendous source of liquidity for the institutional players.

Shannon Allmon: At BlockFi, we sit at the intersection between the retail side and institutional services, partnering with our clients to help them find liquidity. From 2017, BlockFi really pioneered on the retail side of how we provide the ability for our clients to have liquidity and utilize their assets for more than just the gains within the market so that clients can utilize it as a collateralized loan and in return, receive USD. 

As we've gone through this, we've seen how the market has been changing. People are very excited about how they can get into the market, but also how we can help them and provide liquidity both through our traditional means in the retail side, but also looking for ways that we can provide liquidity for our institutional partners.

What are the railways that enable this sort of marketplace to exist?

Shannon Allmon: On the retail side, it's not what you consider in your traditional credit underwriting, it's more so coming from a collateralized loan aspect. So the client has the assets, Bitcoin or Ethereum, and they want to be able to borrow. Iff the client has the assets available, they can choose the loan that they would like to receive based on loan to value, and then they would start making payments on the next month. 

So it's not a loan that looks at the credit score, but is very much a securitized loan. With those assets, they can go and purchase or finance other areas such as a mortgage, a car, or however they would like to utilize their assets.

Matt Ballensweig: On the institutional side, there's a lot of moving pieces you need. First is a segment of depositors that are looking to generate yield, which enables this whole marketplace to exist. You then need platforms like BlockFi or Genesis that can aggregate those deposits and provide infrastructure for those folks to kind of generate that return. And then you need risk managers, to think about how you are actually deploying that capital and the risk adjusted nature of generating the yield on that capital.

Then you also need exchanges, venues to offer liquidity. That’s both centralized exchanges, like Binance or FTX, but also decentralized exchanges to really kind of provide liquidity into the marketplace. And then lastly, you need fiat on and off ramps – how you get dollars onto exchanges as stable coins.

How are crypto crypto lenders able to offer such high yields to deposit accounts?

Matt Ballensweig: This is obviously a question that Genesis and the market at large gets a lot. If you look at where stable coin yields on USDC, or USDT or dollars have been over the last three years, they've been in the 8% to 12% range. Compared to other markets, it is a lot higher yielding. If you look at Bitcoin and Ethereum yields, they're substantially lower in the 2% or 3% range.

Most people immediately attribute the higher yields to more risk in the system, which is not a bad framework to think about things. But I'd say for crypto, it's less of that and more of there's just more inefficiency in the market. It's much newer, and with that comes the ability to generate a higher return on investment via trading if you're a sophisticated institution.

I think the thesis is that over time these spreads will come down and diminish, but because it's such an innovative, fast moving, evolving ecosystem, there just tends to exist a natural arbitrage opportunity if you have a big trading operation and access to capital.

Shannon Allmon: All the time we get from the retail side, it's too good to be true, there's got to be some catch to it, or there's issues with the risk of my assets. But really, it comes down to the margin between your institutional borrower and your retail lender as they give their assets over. 

Because of the where we are in terms of the competition, the spreads are just much higher in terms of clients can come in – they borrow at 12%,13%,14%, which gives us the ability to be able to offer that to our clients to get them over the hump as they're trying to learn about crypto and give them rates similar to 6%, 7%, 8%. 

That gets new retail clients into the market, they want to be able to take advantage of these extremely high yields. And in doing that, we're able to provide liquidity into the market. 

The main use cases we've seen for crypto back loans were typically speculative in nature. Has this changed?

Shannon Allmon: On the retail side, you get clients who are concerned holistically on what's going on in the macro environment. So we get people who pull in, pull out, wanting to take advantage of the asset going up while they can also have liquidity to live their lives. But right now, we have some clients who want to take advantage of the down market to buy the dip, and then we have other clients that are trying to figure out what this means for the overall crypto ecosystem, so they're pausing. 

I think it's very much like traditional equities you have on the retail side, you have clients come in and come out, they have different drivers.

Matt Ballensweig: If you look at the evolution of the crypto market and the lending and yield markets, I think a lot of the original demand was definitely driven by speculation on both sides of the market. When we actually first started our business back in 2018, a lot of it was right at the height of the bubble, where folks wanted to borrow to basically short the market. And then, obviously, on the next bull cycle we saw all of the demand to borrow dollars so that they can buy crypto with the borrowed dollars. 

I think speculation was certainly a big part of the engine that powered lending markets for a long time. But then, over the course of the next few years, you have seen a lot more sophisticated traders come into the space.

How do you think the industry would benefit from more regulation or transparency on this front?

Shannon Allmon: It helps create transparency, it invites more clients into the ecosystem, it helps to drive innovation, and rule out all the bad actors. But it has to come with the right balance, because if it comes in too heavy handed, it does the opposite of its intention. It drives out competition and it scares clients away. So right now, we're working very closely with regulators on how we create that transparency for clients on the products that we're building.

Matt Ballensweig: First and foremost, I think the industry obviously can definitely benefit from more regulatory clarity in general, and specifically in lending markets, just given how much growth there's been on both the institutional side of the market and retail side of the market. It's been one of the fastest growing segments in all of crypto. 

And even if you're just looking at, you know, the origination numbers for Genesis, you know, we're now over 200 billion of loan origination since since since inception back in 2018. So, you know, 

It goes to show that this is obviously an industry that's here to stay and requires careful thought from regulators and the firms that are leading the way to partner with those regulators to figure out the right structures.