Cryptocurrency is increasingly integrated into mainstream finance, blurring the lines between traditional and decentralized finance. The GENIUS Act recently passed the Senate on June 17 and is moving to the House, aiming to establish a federal stablecoin framework.
Major banks are adopting crypto as collateral for loans. JPMorgan announced it will accept bitcoin ETFs, like BlackRock’s iShares Bitcoin Trust, as collateral for retail and institutional loans. Goldman Sachs has accepted bitcoin collateral since 2022.
MicroStrategy’s subsidiary, MacroStrategy, took a $205 million bitcoin-backed loan from Silvergate in 2022, collateralized with $820 million in bitcoin. Although the loan was repaid before Silvergate’s 2023 closure, regulatory filings reveal risks associated with bitcoin collateral. Borrowers must provide additional collateral or repay loans if bitcoin’s price drop causes loan-to-value (LTV) ratios to exceed thresholds.
These conditions mirror traditional lending mechanisms, where borrowers must maintain adequate collateral or face immediate repayment demands. However, volatile crypto prices intensify these risks.
A report by Galaxy indicated the crypto lending market was $36.5 billion at the end of 2023, down from a peak of $64.4 billion in 2021 following lender failures. Yet, new legislation and regulatory easing are expected to boost lending activity.
In March, the Office of the Comptroller of the Currency rescinded earlier restrictions, enabling banks to include digital assets in secured loans. Despite this progress, cryptocurrencies’ price volatility remains a significant risk. The Federal Reserve highlighted that crypto-backed loans could create feedback loops where falling asset values trigger forced liquidations, exacerbating price declines.
The Fed also warned of blockchain network congestion, which may delay borrowers in recapitalizing collateral, raising the risk of additional liquidations.