Banking and investment giant Goldman Sachs has issued its first cryptocurrency-backed cash advance, signaling a traditional financial institution’s entry into a space that has generally fallen under the purview of decentralized finance, or DeFi.
Goldman’s loan was backed by Bitcoin, and while the details weren’t disclosed, the firm told CoinDesk that “the interesting part for us is the structure and the 24-7-365 day risk management.”
The loan differs from DeFi lending in several notable ways. For one, Goldman gave the borrower fiat currency instead of dollar-pegged stablecoins, which are used by DeFi lending protocols like Maker, Aave, and Compound, which offer stablecoin loans backed with 125% to 150% crypto collateral that is in Smart contracts are included.
See Also: PYMNTS DeFi Series: What is DeFi?
Second, the whole purpose of cryptocurrencies starting with Bitcoin was to eliminate the middlemen from financial transactions — the opposite of borrowing money from Goldman Sachs Bank.
And it’s not the first sign that companies in the traditional finance or trad-fi space are overcoming their skepticism about crypto.
Goldman Sachs just announced plans to expand its crypto trading business, and banks like JPMorgan and Citibank are offering crypto investment products to some clients. Blackrock announced plans to offer crypto trading services earlier this year and just 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 removed a top crypto executive from JP Morgan Chase to create a new digital assets arm.
Also Read: Apollo Takes on JPMorgan Veterinarian Christine Moy in Digital Asset Project
TradFi follows the money
However, traditional finance is becoming more interested in DeFi, both because the technology can reduce costs and because there is money to be made. According to DeFi Pulse, about $75 billion is currently tied up in various DeFi projects. That’s up from $9.7 billion two years ago
And while that’s less than November’s total locked value of $100 billion, or TVL, it’s a number that, when combined with crypto’s $1.7 trillion market cap, is just too much for TradFi companies to go by to ignore them.
Alongside investing in the liquidity pools of the automated market makers (AMMs) that power decentralized exchanges (DEXs), crypto lending is the be-all and end-all of DeFi. But while DeFi loans can technically be used for anything, the vast majority will be fed directly back into other DeFi investments — yield farming and liquidity mining.
See Also: PYMNTS DeFi Series: What is Yield Farming and Liquidity Mining?
Borrowing DeFi loans can be risky as crypto volatility regularly leads to margin calls, even with severe over-collateralization.
TradFi vs CeFi vs DeFi
Goldman isn’t the only traditional financial firm offering Bitcoin-backed lending — Fidelity Digital Assets began offering cash lending for crypto collateral in late 2020, working with crypto-focused Silvergate Bank and a number of crypto-lending FinTechs like Nexo together. Celsuis and BlockFi are known in the industry as Centralized Finance or CeFi.
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 laws. That was after the SEC threatened Nasdaq-listed crypto exchange Coinbase to halt plans for Coinbase Lend, leading to 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, some of these CeFi firms are in the mortgage lending space, meaning they offer loans for more traditional purposes — and in traditional dollars — than most DeFi lenders.
Crypto-friendly Signature Bank announced during its conference call last week that it intends to compete with Silvergate Bank by offering crypto-backed lending.
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NEW PYMNTS DATA: INNOVATION STUDY ON THE FUTURE OF TRADE LIABILITIES – APRIL 2022
Above: While more than half of SMBs believe an all-in-one payment platform can save them time and improve cash flow transparency, 56% believe the solution could be difficult to integrate with existing ` and AR systems. The Future Of Business Payables Innovation Report, a collaboration between PYMNTS and Plastiq, surveyed 500 SMBs with sales ranging from $500,000 to $100 million to find out how all-in-one solutions are exceeding SMB expectations and future-proofing their businesses be able.
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