Consultants believe that securing loans with cryptocurrencies is a very risky approach. (Photo: 123RF)
LES KEYS DE LA CRYPTO is a section that patiently decodes the world of cryptocurrency and its stock market, industrial and media turmoil. François Remy’s mission is to identify promising entrepreneurs, decode technical progress and anticipate the industrial and societal impacts of this digital currency.
(Illustration: Camille Charbonneau)
This segment of the financial market is still far from reaching maturity, but the development of cryptocurrency loans and customer demand are progressing so much that banks would have to take care of it.
A small red flag has just risen somewhere in the army of consultants who follow the advance of cryptocurrencies. A warning issued to banks by Dimitrios Goranitis and Andrada Tanase, two heads of risk management consulting and regulation at Deloitte. The financial and economic mechanics would be in the process of beginning a historic shift.
For centuries, money was borrowed by banks from savers to lend it to people who want to undertake, recall the two experts in a note. But the cryptocurrency ecosystem now uses the same principle. In search of passive income, holders of this digital money are willing to lend it to others.
“The demand for this new feature is massive, with a significant number of users asking for its implementation, given the attractive interest rates offered. On some platforms, bitcoin deposits can achieve returns of 8.5% per year. And for some stablecoins, this figure can go up to 14%, which surpasses many asset classes”, we note at Deloitte.
Which banking alternative?
How might the banking industry react? What more do these crypto platforms such as BlockFi, Celsius and others have? Would it just be an additional risk to add to the banks’ activities?
The risks associated with these new financial cogs for cryptocurrency lending would not be difficult to pinpoint, according to the consultants. Credit guarantees, customer identification, origin of funds, so many points of attention which do not seem insurmountable.
But this emerging market crystallizes certain dangers without common measure in traditional finance. Cryptocurrencies can disappear overnight. Or be stolen in quantities otherwise impossible to mobilize. Deloitte recalls without naming the Poly Network hack during which the equivalent of 600 million US dollars had been stolen. Extraordinary case since the hacker returned his huge loot.
When it comes to financial counterparties, the consultants believe that securing loans with cryptocurrencies is a very risky approach, especially when the market is rocking and dipping. Many crypto investors tend to liquidate their position. But these price or even valuation dynamics of digital assets would escape just as many bankers.
“Play with fire”
These concerns are not new or recent. Even the former governor of Canada’s central bank confessed in the midst of a market surge that bitcoin was keeping him awake. But the sickly disdain and poorly argued criticism of officials, monetary, financial or regulatory, have allowed cryptocurrencies to develop into a sort of free zone on the fringes of the real economy: “so that one can play with fire even if the implications and the risks are not fully understood”, we pin at Deloitte.
Who isn’t looking for a high return, for as low a risk as possible? But the thresholds of tolerance to danger vary greatly. Over the course of more or more sensational news, the monetary and financial gendarmes multiply the bursts of conscience and try to frame this new form of “Internet money”. Difficult to channel, limit abuse, or even ban, before understanding the industrial and societal issues.
Banks and regulators see this “bright and less volatile future for the cryptocurrency market, with reduced fraud, money laundering and stolen coins,” the advisory firm’s watch memo states.
But waiting for a miraculous normalization of this nascent market in order to trust it fully means running the ultimate risk of letting it progress to a stage of maturation where it will be too late to occupy a decisive position there.