Cryptocurrency is increasingly integrating with traditional finance, notably through its growing use as collateral in lending. The GENIUS Act, advancing in Congress after Senate approval on June 17, aims to establish a federal framework for stablecoins, signaling further regulatory attention to crypto assets.
Major banks are adopting bitcoin as collateral for loans. JPMorgan recently announced it will accept bitcoin ETFs, including BlackRock’s iShares Bitcoin Trust, to back retail and institutional loans. Goldman Sachs has accepted bitcoin as collateral since 2022.
In 2022, MicroStrategy’s subsidiary MacroStrategy secured a $205 million term loan from Silvergate, collateralized by $820 million worth of bitcoin. Although the loan was repaid and Silvergate later ceased operations in 2023, this deal underscores the rising role of bitcoin in secured lending.
Loan agreements typically require borrowers to maintain certain loan-to-value (LTV) ratios. Regulatory filings reveal that if bitcoin’s price falls causing the LTV to exceed 50%, the borrower must add more bitcoin collateral or repay part of the loan to reduce the LTV to 25% or less. This mechanism, common in loans, carries particular risk given cryptocurrency volatility.
Galaxy’s April report estimated the crypto lending market at $36.5 billion at the end of 2023, down from a $64.4 billion peak in 2021 amid lender failures. However, with evolving legislation and relaxed regulatory guidelines—such as the Office of the Comptroller of the Currency’s March letter allowing banks to include digital assets in secured lending—the market is expected to grow.
Despite this optimism, risks remain high. Bitcoin and other cryptos are highly volatile; even stablecoins have experienced value fluctuations. A Federal Reserve report last year highlighted that using crypto as collateral can trigger negative feedback loops, where falling asset values lead to forced liquidations, accelerating price declines. Additionally, blockchain congestion can delay borrowers’ efforts to recapitalize loans, increasing liquidation risks.