Regulatory possibility of fiat lending from crypto collateral

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ashkoba

New member
Some crypto investors I know have been discussing a startup company whose unique selling proposition was originally to provide short term loans collateralised by longer term cryptocurrency deposits. Their business plan is considered technically, economically and mathematically well-designed but in my opinion has ignored the "elephant in the living room"... finding a compatible regulatory jurisdiction.

The two most compelling benefits of their planned crypto-to-fiat lending would be:
  1. Continuous holding of one's favourite cryptocurrencies, rather than having to sell crypto assets in spot markets, to get needed cash during crypto bear markets.
  2. The loaned fiat currency, rather than possibly being taxed as capital gains (and generating a "taxable event" in most jurisdictions), would avoid tax altogether (as with all loaned cash in most jurisdictions).
It's about a year now after we first heard this elevator pitch, and the company is still using their slogan "Be your own bank" as per the above model, but has now downplayed the idea above in favour of other plans like cross-blockchain compatibility. To sceptics like us this seems to confirm that the elephant in the living room is now blocking the entrance... and that they've failed to find even one bank or jurisdiction that could support the "fiat lending from crypto collateral" premise.

This seems even more likely now that the WEF and its minions everywhere, especially Europe, seem determined to sink their vampire teeth into crypto and throw away the corpse. My mistrustful mind sees the Davos men quietly blacklisting such businesses from conventional economic participation, just as they appear to be putting down similarly progressive projects in Africa proposing peer-to-peer financing and telecoms.

The company in question was chartered in the crypto friendly jurisdiction of Zug, Switzerland which I believe has different banking rules than the EU which offers the globally unique EMI charter. My understanding is that the crypto-to-fiat lending capability would be offered through something like an EMI, with some additional permission from regulators allowing them to distribute fiat currency from loans secured with crypto.

So my question is two-part:
  1. How likely are my suspicions that this project has hit a hidden regulatory impasse (which remains undisclosed to their investors and unmentioned in any update to their business plan) that would make this idea impossible, rather than difficult, to implement?
  2. What avenues could be pursued, or have been pursued, to construct a regulated financial entity like this, and how could we find more about the relevant jurisdictions & charters?
Incidentally about six months into this stall, another project has emerged from India which claims some progress in assuring the required Indian banking partnership. Given that India has only recently lifted its poorly-defined ban on cryptocurrency, I would guess they've either found a local solution to European & worldwide regulatory difficulty or they're simply another copycat selling a dream.
  • So (3. for the Indian audience): Has there been any tentative progress for similarly organised business in India, or can the oppressive Reserve Bank of India be counted on to shoot this idea down as well?
 

JohnnyDoe

Mentor Group Gold
Set it up anonymously as a DAO and lend stablecoins. You might also issue your own token. Perhaps even your own stablecoin and blockchain! You could hard peg your proprietary stable 1:1 to USD, make it available as a collateral and enjoy the results smi(&%
 

ashkoba

New member
It exists already. Search Nexo.
thanks @jakubko666 - I had no idea about them. Nexo (Unlock the Power of Your Crypto • Nexo) appears to be just a lending company holding crypto assets as collateral, rather than a crypto-based EMI empowered to offer loans (i.e. the other way around of what I was describing:
  1. the 13.9% maximum interest rate for over-collateralised loans (you can borrow typically only 15 to 30% of unpegged cryptos), very generously allowing for defaults resulting from volatile collateral assets, is nothing short of usury... typical of car loans collateralised by your car.
  2. the company itself seems only to maintain a cryptocurrency (NEXO) capitalised from people who are basically staking it to halve their maximum interest rates (to be capped at 6.9% interest) or get into Gold or Platinum tiers which Nexo says can reduce the interest rates down as low as 0%... again suggesting this is a conventional lender with cryptocurrency-based incentives.
  3. Nexo is entirely a custodial solution (courtesy of BitGo: BitGo - The leader in institutional digital asset custody, trading, and finance) where you send your cryptocurrency for whole custody with the lender: neither decentralised nor "smart contract" based as a blockchain-based solution would be.
The company profile (https://www.crunchbase.com/organization/nexo-0ab2) shows they're based in London, with regulatory compliance (Licenses & Registrations • Nexo) all over the world & USA, listed as a "debt refinancing" company rather than a blockchain-based "bank" smart contract or DAO offering fiat loan & conversion features.

So I appreciate the reference & think this is an interesting business proposition but, since it would be simply chartered as an easy-credit financing company, it doesn't really answer my question about regulatory opportunities & impediments for bridging crypto & fiat in this way.

Maybe I could offer specifically how these projects are proposing to address this market differently & someone might suggest what the regulatory challenges would be?
 
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JohnnyDoe

Mentor Group Gold
thanks @jakubko666 - I had no idea about them. Nexo (Unlock the Power of Your Crypto • Nexo) appears to be just a lending company holding crypto assets as collateral, rather than a crypto-based EMI empowered to offer loans (i.e. the other way around of what I was describing:
  1. the 13.9% maximum interest rate for over-collateralised loans (you can borrow typically only 15 to 30% of unpegged cryptos), very generously allowing for defaults resulting from volatile collateral assets, is nothing short of usury... typical of car loans collateralised by your car.
  2. the company itself seems only to maintain a cryptocurrency (NEXO) capitalised from people who are basically staking it to halve their maximum interest rates (to be capped at 6.9% interest) or get into Gold or Platinum tiers which Nexo says can reduce the interest rates down as low as 0%... again suggesting this is a conventional lender with cryptocurrency-based incentives.
  3. Nexo is entirely a custodial solution (courtesy of BitGo: BitGo - The leader in institutional digital asset custody, trading, and finance) where you send your cryptocurrency for whole custody with the lender: neither decentralised nor "smart contract" based as a blockchain-based solution would be.
The company profile (https://www.crunchbase.com/organization/nexo-0ab2) shows they're based in London, with regulatory compliance (Licenses & Registrations • Nexo) all over the world & USA, listed as a "debt refinancing" company rather than a blockchain-based "bank" smart contract or DAO offering fiat loan & conversion features.

So I appreciate the reference & think this is an interesting business proposition but, since it would be simply chartered as an easy-credit financing company, it doesn't really answer my question about regulatory opportunities & impediments for bridging crypto & fiat in this way.

Maybe I could offer specifically how these projects are proposing to address this market differently & someone might suggest what the regulatory challenges would be?
So basically you want to be a bank offering Lombard loans collateralized by crypto?
Simple: you just need a banking license. Switzerland and Liechtenstein are your best options.
 

ashkoba

New member
thanks @JohnnyDoe - I'm guessing that's why MELD is crypto licensed in Zug (to my knowledge). I guess you are also confirming there would be no regulatory prohibitions for such a company: i.e. that banking licenses are obtainable for companies with declared crypto offerings.
 
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JohnnyDoe

Mentor Group Gold
thanks @JohnnyDoe - I'm guessing that's why MELD is crypto licensed in Zug (to my knowledge). I guess you are also confirming there would be no regulatory prohibitions for such a company: i.e. that banking licenses are obtainable for companies with declared crypto offerings.
I have no idea of how MELD is or will be organized.
You might look at Sygnum Bank for inspiration, they do offer Lombard loans.
Obtaining a banking license is feasible but no easy (nor cheap) task. You will need a minimum capital of Chf 10m fully paid up, proper infrastructure in place and good lawyers to assist you.
 
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