Crypto’s Institutional Lending Market | European Blockchain Convention

foreign market and what we can expect thank you thank you good afternoon everyone welcome to today's panel on cryptos institutional lending Market with Leon gron from Spartan group and myself my name is Jamie Knowles I work at Galaxy on the institutional sales desk in London Galaxy are a Global Financial Services and Tech firm focused on blockchain and digital assets that was founded by Mike novogratz in 2018 we have a variety of different business lines that include Asset Management Investment Banking mining protocol Solutions venture capital and Global markets within the global markets area where I sit we are one of the largest OTC liquidity spot providers and derivatives providers and we also run one of the largest OTC lending desks still within crypto our lending business specifically focus on how can we help our clients gain responsible leverage and capital efficiency on their digital assets and crypto Holdings and also their cash Holdings and within that we also look to provide various Solutions such as margin lending color loans specialty lending and revolving credit facilities and finally for context our clients include trading firms hedge funds both crypto native and tradfi High net worth individuals family offices and BC firms with that I hand over to my co-speaker Leo for a introduction thank you very much and pleasure to be here everyone so thank you for for taking the time to talk about uh probably one of the most exciting areas in this industry at that point in time by way of context and background my name is Leo Groen I'm originally from Australia I've spent the last 10 years between Europe and Asia working at the intersection of finance and Tech I got into the blockchain space I've been full-time entrenched in this industry since 2016. so as much as I would like to say that the occurrences over the last 24 months are stand out and and unique to themselves I can say I've been through this before and a lot of the things that we're seeing unfortunately are not new which is exactly why Frankly Speaking we at Spartan group are really in this industry with a long-term perspective of being a strategic and trusted platform for operators in this space so for those of you not familiar with Spartan group we're founded in Asia without offices between Singapore and Hong Kong in 2017 by three former Goldman Partners I think nowadays that probably is a more common occurrence but at that time certainly was a big big step moving into this industry and really being associated with what was an emerging space around crypto at Spartan specifically we do two things so we have our asset management arm and deal making activities so across our asset management business we are running a liquid hedge fund so we're one of the First Institutional asset managers out of Asia which has a three plus four plus year track record investing into digital asset space we run two Venture funds one focus on D5 which is certainly the area of interest when we look at empowering and backing many of the entrepreneurs who are working within the lending space and also actively investing in the gaming metaverse and nft opportunity set let's say in addition to that we're one of the most active dedicated deal making advisory groups similar to Galaxy we collaborate with them on many ways and pleasure to be here to talk more about specifically our topic today fantastic thank you Leo so when I look at the crypto landscape over the last year one of the key areas that has changed the most has been on the institutional lending side I think maybe a good place to start for the audience today would be just a little bit of context around where we've come from what's happened and where we are today yeah so I guess I can I can give a brief summary of of at least uh what I think is the last 24 months so I won't go back uh too far into ancient history which which tends to be the case in crypto so two years is already plenty uh but Frankly Speaking right I think what was a market that's emerged from nowhere so I mean institutional lending in crypto didn't exist two years ago either uh what we saw happen in a meaningful way uh and evolve right um through the bull market of 2021 was an engagement and willingness of people to start using either collateralized or uncollateralized lending products and solutions now in more stable financial markets this is obviously a known and trusted practice which is you know basically the Crux of value in the financial system so if you look at I mean ECM versus diesel Equity Capital markets first debt and instruments linked to debt I mean it's a much larger amount of value which is on the credit side of of the industry so people looking at crypto got excited about that aspect of yes spot is interesting yes derivatives trading is interesting but how can we get more leverage more margin into the system and create um obviously was a very attractive snowball that came through for a lot of people who were profiting from that and equally fast um in in the last 12 months specifically filling the other side of that in terms of of Boom bust Cycles right and um my point here would be make no mistake right this is not a failure of crypto this is not a failure of our ecosystem this is a failure of actors within our ecosystem who were making decisions and you know the point that I'd always like to reiterate and why we're so bullish about credit markets within crypto still is because technologically speaking we haven't seen things implode right if we look at many of the large-scale protocols who have gone out to establish foundations and principles by which people can participate in defy participate in borrowing and lending pools these things have all stood the test of time despite collapsing market prices collapsing token prices within those governance protocols and these things are still standing strong what we have seen obviously is an abuse of you know Goodwill I mean a sufficient amount of Fraud and I won't go into too much speculation on things which are happening in real time but you know actors within our industry who likely will see you know criminal charges and and deal with those consequences is a function of the human nature of this industry so you know when people talk about what happened in in a nutshell right long story short is we got carried away right people got carried away and now it's about bringing that back down and focusing on what actually matters but how have you guys seen that at Galaxy yeah so first of all completely agree with all your comments there so you know the two key buzzwords at the moment or from the last 12 months have been too much leverage in counterparty Risk so when I look at how the lending Market has changed over the last year it's really unsurprisingly seen a big dry up you know institutional loans on a notional basis have had a significant drawdown from last year and that's really well firstly understandable just given what the market has done and also due to some key changes in Market structure both on the demand side and on the supply side so on the demand side first of all clearly we've had some of the biggest players within borrowing are no longer available so you know guys like 3ac Alameda they're no longer in the market and naturally just because of what the market has done and the turbulence from last year a lot of the main borrowers such as crypto hedge funds Trading phones within digital assets they've either pulled back risks significantly or they're no longer in business so the borrow side of the equation has pulled back significantly on the supply side as well unsurprisingly loads of potential lend or loads of previous lenders are no longer in business so guys like Celsius Voyager block fi Genesis they are no longer around and the key thing is that lenders that were still standing they have been significantly worried about counterparty risk and had pulled back significantly towards the back end of last year there just really was no willingness to sort of lend and the collateralization levels that people wanted went really through the roof and that's really a key thing to focus on as well in this conversation because really what drove the huge amounts of Leverage last year was the ability of firms to gain access to unsecured borrow effectively so the ability to borrow one dollar without having to put down any collateral and unsurprisingly that was what what build leverage upon leverage and when that was Unwound there was no ability to digest that so what's happened now is that the market S1 the other way where lenders now want too much collateral so things are over collateralized so now lenders are wanting it anywhere between 1 30 to 150 percent collateralization levels potentially sometimes even more and people in the market really just aren't willing to pay that so there's a big spread in the amount that borrowers are willing to pay versus the amount that you know will it the amount that lenders are potentially looking to charge at the moment um and on that point it's probably you know like I was saying counterparty risk is the big thing that people are talking about from your perspective you know trust and counterparty risk you know how can we look to rebuild trust you know within institutional lending you know what are your thoughts at Spartan around that topic yeah so I mean I agree with everything that's that's been said and this topic of counterparty risk is something that is so new in this industry and you know that is problematic in and of itself like why were people not asking questions going through a diligence process with a counterparty for any kind of formal relationship I mean the emphasis in this industry on the past prior years has always been around compliance and Ticking boxes on a sheet right and I think as we as an industry mature and become you know much more sophisticated in the way in which we're transacting with each other with people through protocols through direct counterparty relationships these are things that have not caught up so those processes have not caught up but the size and the scale of the transactions that were happening were talking about billions and you know multi-billion Dollar Deals going through here now anyone who's worked in compliance so in the chatfy world understands for people to be able to lend and those sides of amounts of money the diligence process to onboard a new counterparty even to get a home loan right I mean as a retail citizen I mean you know how difficult that can be and we're talking about checklists within our industry that was probably easy to get than a mortgage right and I think that this is some of the problems that have been flushed out of the industry now and where we're really focusing on at Spartan I mean through our Venture fund specifically as big Believers in D5 the crypto native element of a protocol-based seamless technological layer for transacting with people the credit markets is a key part of that market infrastructure of the future specifically where we've focused our time on I mean there's been um you know backing entrepreneurs in this space and you know two of the companies that I would mention with an our portfolio who are solving specific elements of that market infrastructure of the future again Shameless plug so we're invested please don't not Financial advice but referencing of course some of the things that we're seeing is specifically one organization credora which had come forward and built one of the first Frameworks for evaluating counterparty risk now that sounds like such a basic thing to have had that our industry has not had that so there's been no standardization of what is diligence in a process who is the person I'm taking money from and how many other people are they also taking money from I think these fundamental questions and we can go into what that means and looks like in practice when we're enabling that through on-chain governance and metrics but the basic proposition is I'm actually asking you questions and going through that process to identify a counterparty risk and having a way to evaluate that so that's step one I think once you have a basic functioning level of a Marketplace or an infrastructure which is saying this is the con these are the counterparties and you know who you're engaging with the way in which you're actually executing those transactions how do you enable that and that's where we're really seeing them in one of our other portfolio companies which we're very excited about is an organization called Celeste I mean they are creating a debt liquidity hub for people to be able to borrow and lend institutions to be able to borrow and lend and actually transact with each other through a Marketplace like function where you're able to see who else is in the market and and doing this right and I think all of these things are so intuitive within the crypto ecosystem on the spot on the trading side everyone can go and and actually transact with each other but no one's actually built that infrastructure to happen in what is already a very Global industry cross-border everything we do is cross-border but people operate very differently so connecting all of those pieces of the puzzle together is one evaluating counterparty risk to having a foundation for people to able to transact and borrow and lend with each other these are the critical infrastructure pieces that will be the foundation of what we consider D5 2.0 or crypto infrastructure in The Lending space 2.0 which will be the next wave of growth I mean is that something that you guys recognize and relate to yeah completely agree again with all those points I think from our perspective on the OTC side a couple of things needed to Big Bill bring back will certainly counterparty um trust and demand first of all you've got some top down and bottom-up drivers so from the top down perspective first of all to actually drive demand we need to see one first of all time you know time is needed to hear what's happened in the market it's only been three or four months since some of these big unwinds and I think some of the scar tissue there is still fairly fresh the second thing is really just more Market volatility as well so one of the issues while they're borrowing lending Market dried up significantly at the back end of last year which this Market went sideways you know if you guys look at the price of Bitcoin it traded in in a fairly static range for you know multiple months and there was just no incentive for borrowers to borrow and lenders to lend but that's driving Demand on the counterparty side trust specifically it's really down to four things one is really understanding who you're lending to so that goes back to old school fashion risk management around you know understanding the client consistent cause around you know what their Equity is what their nav is what sort of assets they holding Etc the second bit is really around infrastructure like you said being able to in real time look through and understand what type of assets clients are holding and the type of quality or collateral that they're holding and you know something that we've talked about you and I has been the ability to use ZK technology to look through Monitor and evaluate in real-time client assets without having to give away privacy um so those are two there so some of the main things that we're looking at on on a Galaxy also as well we have some you know the other sort of third-party services that include things like insurance and syndication which you know as the loan Market comes back we'll hope to make it a little bit easier on the risk side um and on a longer term basis one of the areas that we are quite excited about is tokenization and the type of collateral that people are going to use certainly you know collateral has a variety of of different sources but you know Bitcoin and eth clearly are higher quality but people have been using collateral in the past things such as ftt which had been deemed as lower quality so over time we hope that you know tokenization of fixed assets you know such as treasuries Etc will allow crypto companies you know on the boring lending side to be able to hold assets that we deem of higher quality which will lead to sort of more secure borrowing lending markets um one of the key things I wanted to talk to you about today Leo was you know on the D5 side just give given the pullback in institutional lending there's clearly been a big shift towards people borrowing and landing on D5 what are sort of the themes and trends that you guys are thinking about with respect to that Spartan group yeah no I mean I think it's certainly an area which is basically still at its infancy right if we think about the level of activity that's happening in crypto lending markets today even if there has been a pullback and interest researching on the D5 side this is still you know immaterial in the shame of where we are on traditional financial markets and where this has the potential to go so I mean obviously players like Ave which are you know pretty much entrenched in the industry at this point everyone understands the basic principle you know that that's possible there contributing to a pool and how we look at this right and the reason why I'm actually so bullish on the opportunity set on the credit side many of the issues that have come by if we consider fintech and and this whole notion of peer-to-peer lending a lot of these opportunities are not born overnight these are ideas and Concepts that have been implicit within the financial industry for so long and entrepreneurs have been trying to validate what's possible I think the enabler and why crypto is is such a a prime position to actually Implement and realize a lot of these opportunities is this idea of the composability of liquidity so you can move once on chain you can move your assets from pool to pull from area to area and be that spot trading leverage and used as collateral to trade on provide margin for or lend against an asset this money going onto the system and being present and transacting throughout is certainly an opportunity set that you know for us frankly is one of the key enablers for unlocking huge amounts of interest of assets flowing into this space and being relevant I think the reality that we have today and some of the challenges in getting there is when we talk about the traditional you know Trad five players coming into crypto who's being a part of this and what are they doing most of these people still don't have the infrastructure to be able to engage in usdc or usdt denominator stablecoin denominated transactions let alone talking about taking Bitcoin or ether's collateral which you know crypto native players would consider blue chip for a traditional financial institution is I can't even hold usdc so how was my how am I getting this composability factor of my liquidity to be able to you know operate throughout the system so you know it's a bit this chicken and egg situation where everyone's sitting around the room waiting for Trad fire to come in and you know not save the day but certainly you know come back in a meaningful way to show interest in this space but at the same time the basic infrastructure allowing for them to participate and I'm not going to start talking about regulation and bore everyone here but that is certainly one of the missing pieces of the puzzle as well that we need to get on top of and allow for these Trad five players to actually participate in this in a meaningful way not just you know through subsidiary and side activities absolutely and just in the interest of time I definitely foresee a future whereby OTC lending and defy lending for institutional clients will be able to coexist uh but with that in the interest of time thank you very much everyone and appreciate your attendance today 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