Cryptocurrencies as Guarantees: The New Financial Frontier
The cryptocurrency market has rapidly evolved from a speculative asset to a class of assets with practical utility in the traditional financial system. One of the most promising and complex applications that has emerged in recent years is the use of cryptocurrencies such as Bitcoin (BTC) and stablecoins such as USDC as a guarantee to access credit and financing. This movement represents a crucial bridge between the world of decentralized finance (DeFi) and the regulated financial system, creating new opportunities and challenges for investors and institutions.
Recently, an emblematic case has caught the attention of the industry: Coinbase, in partnership with Better Home & Finance, has launched a framework that allows borrowers to use Bitcoin or USDC as collateral to finance the initial payment of Fannie Mae’s mortgages linked to loans.
How Does the Use of Crypto as a Guarantee Work?
The basic mechanism involves a lender who owns cryptocurrencies but does not want to sell them – either for tax reasons, for believing in future valuation or to maintain exposure to the asset. Instead of selling, he “loans” those cryptocurrencies to a platform or financial institution as a guarantee. In exchange, he receives a loan in fiduciary currency (such as dollars or real) or in stablecoins.
The process usually follows these steps:
- Blocking of the collateral:The digital asset is transferred to a guarded wallet or a blocked smart contract.
- Rating and Loan Value Rate (LTV)The institution evaluates the asset and determines a loan amount, which is a percentage of the guarantee value (e.g., 50%).
- Release of funds:The borrower receives the requested funds.
- Risk Management:If the value of the security in cryptocurrency drops significantly, the borrower may receive a “margin call” to add more security or pay part of the loan.
The Coinbase Case and Integration with the Real Estate Market
Coinbase’s announcement is significant because it connects cryptocurrencies to one of the pillars of the traditional economy: the real estate market. The structure allows individuals to use their cryptocurrency wealth to acquire real estate without having to conduct a taxable sale event. This solves one of the big long-term “hodlers” dilemmas: how to access the liquidity of their assets without demolishing their positions.
However, this model also introduces specific risks. Bitcoin’s volatility is well known. A sharp drop in price could trigger a settlement of the collateral, putting the borrower in a difficult situation, possibly losing part of his collateral and still owing the loan. Therefore, LTVs for crypto assets are often conservative, usually between 30% and 50%, to create a “bath” of security against volatility.
Risks and Challenges of the Model
The adoption of cryptocurrencies as a guarantee is not free of obstacles. Two major challenges stand out: asset volatility and security.
Volatility and Liquidation Risk
The volatile nature of assets like Bitcoin is the most obvious risk. A loan taken with a 50% LTV can quickly become problematic if the collateral price drops 30% or 40% in a short period, as has happened several times in the market. Automatic settlement mechanisms, common on DeFi platforms, can aggravate sales in moments of panic in the market.
Security and theft
The recent case of Fenbushi Capital founder Bo Shen, who offered a reward to recover $42 million in Bitcoin and other stolen cryptocurrencies in 2022, is a dark reminder of the permanent risks of custody and hacking in the crypto ecosystem. Any institution that accepts cryptocurrencies as a guarantee needs institutional-grade custody solutions, such as multisig wallets or regulated custody, to protect customer assets. Failure to do so can result in catastrophic losses, as seen in previous collapses of exchanges and loan platforms.
The future of cryptocurrencies as a financial asset
The tendency to use cryptocurrencies as collateral reflects a maturing industry. It is no longer just about "buy and save", but about using digital assets productively within the economic system. This practical utility can, in the long run, contribute to greater price stability as assets are "locked" in collateral contracts and used to generate real economic activity.
However, it is crucial to note that the massive corporate adoption of Bitcoin as a reserve value, which has driven part of the previous valuation, seems to be slowing down. According to CryptoSlate’s analysis, Bitcoin’s “corporate treasury boom”, which has reached a value of $100 billion, is losing strength, with purchases focused virtually on a single company (MicroStrategy, now renamed Strategy). This suggests that the next cycle of growth may depend more on utility use cases, such as the guarantee for loans, than just on the narrative of “digital value reserve.”
With a significant base of crypto investors and a sometimes restrictive credit market, solutions that allow us to use cryptocurrencies to access capital may find fertile ground. Local platforms are already starting to explore this model, although at an early stage compared to developments in the U.S.
Conclusion: A Powerful Tool with Warning
The use of cryptocurrencies as a guarantee is a powerful financial innovation that offers liquidity and flexibility to digital asset holders. It integrates the crypto world into the traditional economy and validates the idea that Bitcoin and other currencies can be productive assets.
However, like any leverage financial tool, it amplifies both gains and risks. Inherent volatility and security challenges require users to perfectly understand the terms of the contract, settlement conditions and the solidity of the counterparty. Before using your cryptocurrencies as a guarantee, it is essential to do a careful analysis, consider the loan-value rate (LTV) offered and be prepared for extreme volatility scenarios. In the world of decentralized and traditional finance, the promise of non-sale liquidity invariably comes with a proportionate dose of responsibility and risk.