Coinbase Is on Other Side of Goldman’s First Bitcoin-Backed Loan

(Bloomberg) -- Goldman Sachs Group Inc.'s first ever lending facility backed by Bitcoin is the latest effort by crypto exchange Coinbase Global Inc. to bring money from the Wall Street to the digital-asset space.

“Coinbase's work with Goldman is a first step in the recognition of crypto as collateral which deepens the bridge between the fiat and crypto economies,“ Brett Tejpaul, head of Coinbase Institutional, said in an email response. Coinbase did not provide further details about the loan. A spokeswoman from Goldman Sachs said last week the loan was collateralized by Bitcoin owned by the previously undisclosed borrower.

Bitcoin-backed loans are not new in the digital-currency sector, though for Wall Street they are novel. Some “crypto-native” lenders such as Babel Finance even allow Bitcoin mining firms to put up their machines as loan collateral to borrow cash.

Such borrowers usually post Bitcoin at loan-to-value in the 40% to 60% range, according to Matthew Ballensweig, managing director and co-head of trading and lending at crypto prime brokerage Genesis. The collateral is held by a qualified custodian, and borrowers receive U.S. dollars from the lender at an agreed-upon interest rate.

“Tenors can vary as well as other prepayment terms, but it's a simple structure to bring institutional lenders into the market,” Ballensweig said.

As of the end of last year, Coinbase held more than $566 million of cryptocurrencies including more than $183 million worth of Bitcoin, according to its 2021 annual report. At the same time, the firm reported it had cash and cash equivalents of $7.1 billion, exclusive of restricted cash and customer custodial funds.

Genesis's Ballensweig said that his firm has already structured similar loans with crypto-friendly banks such as Silvergate Bank and Signature Bank. “We are exploring similar structures with large investment banks that want exposure to the space,” he added.

“These types of bilateral agreements are rarely done in a vacuum,” according to a report Monday from crypto hedge fund Arca. “It is far more likely that Goldman is seeing a lot of demand for this type of transaction and is just testing the waters before making a bigger splash.”

Goldman told Bloomberg previously that the deal was interesting to the bank because of its structure and 24-hour risk management. The bank also traded its first over-the-counter Bitcoin options in March. Other Wall Street banks like Jefferies Financial Group Inc. have also started experimenting with crypto-related products and services.