Goldman’s financial alchemy extends to crypto too

LONDON, May 4 (Reuters Breakingviews) - Trust Goldman Sachs (GS.N) to find an angle for investment banks in the cryptocurrency sector. David Solomon’s $100 billion group made a bitcoin-backed loan to $27 billion exchange Coinbase Global (COIN.O), people familiar with the matter told Breakingviews. The structure means Goldman won’t touch crypto-assets. Assuming regulators don’t object, the rest of Wall Street will pile in.

The cardinal rule for banks tiptoeing into blockchain is to avoid holding risky digital assets directly on their balance sheet read more . Global standard-setters last year proposed a 1,250% risk weight for volatile cryptocurrencies like bitcoin and ether read more . A bank with a minimum 8% capital ratio could therefore have to hold a dollar of equity capital for each dollar of crypto exposure. The message is clear: Do not touch.

The puzzle for Goldman and others is therefore how to lend against crypto-assets without ever having to take ownership of them, as might happen in the event of a default. The trick, already used by niche crypto lenders like Silvergate Capital (SI.N), is to get a third party to hold the collateral.

Here’s how it works. A crypto company, or investor, owns bitcoin and wants to borrow dollars. It goes to a bank, which may lend between 40% and 60% of the crypto-assets’ market value, according to a person familiar with the business. A third-party custodian holds the collateral. If the borrower defaults, it sells the bitcoin for dollars and sends them to the bank.

Silvergate has used a subsidiary of asset manager Fidelity Investments as its custodian. Goldman’s Coinbase loan uses a similar third-party structure, according to a person familiar with the deal. In effect, it allows Goldman to make bitcoin-backed loans without ever touching the digital asset.

Regulators may still balk. If bitcoin prices slump, as they often do, the custodian may struggle to offload large volumes of crypto-assets. The bank could then be left exposed.

That said, Coinbase isn’t the riskiest credit. Meanwhile, the loan’s lucrative nature could attract rivals like JPMorgan (JPM.N) and Morgan Stanley (MS.N). Coinbase’s unsecured bonds yield roughly 6% to 7%. Goldman is lending at a similar rate, according to a person familiar with the deal, but with the added benefit of collateral.

The logical next step would be to make crypto-backed loans directly to hedge funds and specialist investors that try to profit from widespread pricing inefficiencies in the nascent industry. That would be an even stiffer test of regulators’ resolve.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

- Goldman Sachs lent dollars to Coinbase Global secured against the cryptocurrency exchange’s bitcoin holdings, people familiar with the matter told Breakingviews.

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