Here is Everything You Need to know on Cryptocurrency Backed Loans


The History and Functions of Banking

Before we plunge into the meat and bones of this article, it is important to highlight that cryptocurrencies do not exist in a vacuum. An increasing number of businesses are beginning to accept cryptocurrencies as an alternative to traditional payment methods. Such businesses include vape shops, lingerie stores, escort businesses, freelancer marketplaces, legal jobs websites ( was the first company in the UK to accept bitcoin and over 100 alt coins), software companies and many other imaginable forms of businesses.

Crypto Loans

crypto loans
Cryptocurrency Backed Loans

The history of banking can be traced back to early civilizations, particularly after human beings transitioned from operating in isolated hunter-gatherer communities, to larger agricultural societies sometime after 12,000 BC. Before currencies were created, merchants and traders largely dealt in food grains and food cattle. This system is called the barter system where transactions were mainly conducted using physical goods, those which related to consumption or daily use.

Instances of archaic or quasi-banking have been recorded in early near-east civilizations of Mesopotamia (latter part of the 4th Millennium BC) and Egypt (18th century BC), as well as in far-east civilizations of India (1750 BC) and China (221 to 206 BC). In Europe, ancient Greeks provided the first source for documenting banking while the ancient Romans’ banking activities as an economic situation had an important presence in temples (Eventually public deposits ceased to be held in temples and were subsequently held in private depositories). The Greco-Roman civilizations had banks that were privately owned, leased or owned by the government.

Gold and other precious metals were the main commodities of value that were used for the purposes of lending and borrowing, as well as storage. Those are the primary functions of banks; the storage of public funds and lending these funds to institutions and individuals.

Banking in the modern sense started in medieval Europe and early Renaissance Italy and can be traced to the cities of Florence, Venice, and Genoa.

It wasn’t until the period between the 17th and the 19th centuries that banking as an institutional service evolved into its modern iteration. Traditional functions of accepting deposits, money-lending, money-changing and transfer of funds were combined with the issuance of ‘bank debt’.

Bank of England was the first modern bank, established in 1695. The 18th century saw the printing of standardized notes between the ranges of £20 to £1,000. This period also the saw the invention of cheques, along with the increase in banking services like clearing facilities, security investments, and overdraft protection.

Bank of England provided the model for central banks all over the world. It was the first limited-liability corporation allowed to issue banknotes.

The primary functions of banks are to store public funds and facilitate these funds to institutional and retail investors. The banks act as a transacting authority between the lender and the borrower. However, there is a major disparity in the processes involving the issuance of loans. Banks tend to charge high levels of interests to borrowers at an upper cap of 25%, and hand over a small percentage of interest between 3% and 5% to lenders. The balance of these interest payments is retained by banks in the form of profits.

Banks offer two kinds of loans; secured loans backed by some form of collateral and unsecured or personal loans. Defaulting on secured loans will result in your collateral being seized by banks. Defaulting on personal loans has far-reaching consequences where it can affect your creditworthiness and loan history negatively. Banks can also take legal action against those defaulting on unsecured loans.

Banks tend to make a ton of profits in the business of lending, sometimes at the cost of the customer or borrower. Even for the lenders- people who deposit their savings into banks, they get very few returns on savings in the form of interests. Since the system of banking is bigger and far more ancient than any living thing currently in existence, it’s very difficult to bypass or hack the system. There’s no authority to approach if a customer feels like they’ve lost out on banking transactions.

When people with low credit scores and a bad loan history get rejected by banks for seeking out loans, they have no choice but to approach agencies offering what is known as a ‘payday loan’. A payday loan is a small, short-term, unsecured loan to be repaid at the borrower’s subsequent payday. These loans can be issued in a matter of hours without prior background checks. However, the interest rates on these loans are ten times that of even the most expensive credit card. The crushing interest rates on payday loans create a cycle of debt for the borrower that is almost impossible to get out of. The payday loan industry in America is worth $9 billion- a clear indication of predatory lending and finance at its worst.

Subprime mortgages are not the answer, as seen the in the financial crisis of 2007-2008. Excessive lending led to ‘subprime’ loans being graded as AAA because banks ran out of creditworthy people to lend to. These loans were technically asset-backed. However, the assets were overvalued at the time. A significant portion of people who have issued these loans failed to make timely payments resulting in a credit crunch and a global banking crisis.

How, then, do we solve these issues related to traditional banking loans?

When Satoshi Nakamoto released the whitepaper for Blockchain technology and Bitcoin, he did it with the intention of creating a decentralized payment system that works on a peer-to-peer network sharing protocol. The highlight of the technology was to present a system based on ‘trust’- that which can operate devoid of a centralized authority.

Blockchain technology is transforming the financial industry as we know it. It may present a viable alternative to traditional banking as it doesn’t have a single point of failure. Specifically, crypto-backed loans can create an atmosphere of benefit to, both, the lender and the borrower by opening up direct lines of communication between both the parties at mutually beneficial terms.

#1Crypto-backed Loans

Crypto-backed loans are an increasingly burgeoning sector in the vast and rapidly developing crypto-finance industry. Crypto-backed loans can be seen as the future of the lending industry as they have the potential to disrupt the traditional banking system– which is often criticized for its lack of transparency, inefficiency and unscrupulous practices.

Prior to being granted a loan, borrowers often have to put themselves through a plethora of documentation, verification, and authentication requests which can take weeks to process. As mentioned earlier, these institutions are also known to charge exorbitant rates of interest on loans and include a number of hidden fees that can serve to hamper a borrower’s financial situation.

Crypto-investors are faced with the daunting prospect of not being able to obtain loans backed by their cryptocurrency assets while having to take loans with preposterous rates of interest. As a result, they devised an idea for loans secured by their cryptocurrency, thus paving the way for crypto backed loans.

Crypto backed loan is essentially a loan given to a borrower which is collateralized by his or her cryptocurrency assets. This loan is secured through a smart contract-based system operating on the blockchain protocol and can be modified according to the borrower’s preferences. Contracts can be created for a duration ranging from merely several days to months, and even years.

After the negotiations are complete and the various specifications of the loan are agreed upon by all parties, the documentation is processed almost instantaneously on the blockchain and the loan is remitted to the borrower. No credit score checks, paperwork, and unnecessary authentication processes are required.

Additionally, in countries having hyper-inflationary environments – investors seeking safe havens in cryptocurrency can obtain loans at reasonable rates of interest instead of facing the prospect of borrowing from local banks which is close to impossible since one can’t borrow from a bank during times of hyperinflation (The value of the money borrowed is significantly lower than when it was lent out). Hence, crypto loans serve as a more advanced, secure and efficient upgrade to traditional loans.

#2The Underlying Process of a Crypto-backed Loan

Crypto loans operate in a manner like traditional loans. Lending platforms remit funds to borrowers after agreeing on the terms and conditions of the loan. Borrowers are required to make frequent interest payments to the lenders. The interest rates on these contracts could be fixed or floating, and vary according to several conditions, which may include the quality of the collateral, tenure of the loan, market situations, etc.

Once all the required payments are made, the collateralized cryptocurrency is transferred back to the borrower and the contract is declared to be completed. This entire process is facilitated by the blockchain protocol which serves as an efficient, timely and transparent platform that imposes obligations on all parties to the contract. Hence, this eliminates the possibility of disputes from either end and the need for formalities of any kind, thereby providing a clear picture of the transaction.

Loans given to borrowers are collateralized by their crypto assets. However, it is important to note that since crypto assets tend to be volatile in nature, they can be subject to margin calls. What this essentially means is that, in the event of the collateral value dropping beyond a certain level, the borrower is obligated to put up further collateral or make a payment to re-secure the loan. Margin calls serve to protect lenders from downside risks in case there is a sharp drop in the value of the collateralized assets.

Despite its merits and potential, crypto backed lending has not truly taken the industry by storm yet. This is primarily due to the number of skeptics present, legalities and restrictions placed on it. However, a lot of new companies are being created to solve these issues. These platforms offer borrowers the opportunity to leverage their cryptocurrency assets to meet their spending requirements while still staying invested in and participating in any potential upside in the value of their cryptocurrency.

#3Reasons to Avail a Crypto-backed Loan

Now that we’ve understood what crypto loans are, and how they function – we need to understand why it is smart for people to avail these loans.

Getting a loan, especially one involving a huge amount, is neither easy nor simple in our post-modern economy.

Banks are very slow in issuing loans to new start-ups and SMEs. If banks do lend to these enterprises, they offer very expensive loans, keep all the profits and pass on the liability to a third party. This results in very little long-term accountability. This is also one of the causes of the economic collapse of 2007-2008.

Fortunately, there is a far better solution discussed in this article. Here are a few reasons as to why availing crypto loans are smart, especially for a Holder.

Holders won’t have to sell their Crypto

Holding onto crypto, could turn out to be significantly more profitable in the long run and selling it at the current rate could serve to be an extremely regrettable decision in hindsight.

While taking a crypto loan, holders would get the money they need without the need for worrying, as most of the popular crypto-backed money lending businesses allow you to claim your assets back whenever you want without facing any penalties regarding early repayment of the loan.

Surprisingly Simple Process

There are a lot of misguided people out there spreading rumors about how getting a crypto loan is just as hard— if not, harder than getting a normal loan but they couldn’t be further from the truth.

People can avail these loans sitting at home (Provided they have the necessary collateral in the form of cryptocurrency), as compared to traditional loans where people have to visit their respective banks and physically meet with a bank employee to request for a loan.

Instantly Issued

Unlike conventional or normal loans that require lengthy and complex paperwork and documentation, crypto backed loans get issued almost instantly.

In fact, many people get surprised by just how quick the whole process is and how they got the money they need in their accounts in under sixty minutes.

Low-Interest Rates

One of the best attributes of crypto-backed loans are the low-interest rates associated with them. Most of the major crypto-backed money lending websites charge a very low rate of interest on these loans.

This is fantastic for people who have problems paying high-interest amounts due to the fact that most of the developed world is quite comfortable with taking on expensive debt. This is because a lot of people aren’t financially informed, resulting in the prioritization of short-term loans over long-term loans.

No Income Tax

A major issue that holders face is the payment of an income tax. On taking a crypto-backed loan, holders would still be in possession of their crypto-assets and since they are not selling their cryptocurrencies, they wouldn’t have to pay an income tax.

Possibility of Future Profits

While the holder’s crypto assets would be taken as collateral–as previously stated–they would still belong to the borrower who will not lose out on any potential gain they could earn during a rise in the crypto value of their assets.

This makes taking crypto backed loan instead of selling cryptocurrency an extreme win-win situation for the borrower.

All the reasons come together and make for a pretty compelling argument in favor of the decision to take a crypto loan. However, one might still doubt if these loans are actually similar to normal bank loans or whether they are, in fact, different.

#4Crypto-backed Loans vs Traditional Banking Loans

In the case of Crypto loans – customers avail fiat currency, or borrow another cryptocurrency, and use their cryptocurrency as collateral. On the other hand, it is common knowledge that the value of cryptocurrencies are volatile where prices may jump or fall due to a variety of factors. In situations where the values of cryptocurrencies are expected to fall, borrowers can exchange their fiat for cryptocurrencies liquidate them, thereby shorting the market.

The main difference between crypto loans and regular bank loans is the fact that crypto loans are based on collateralized lending, whereas banks offer personalized loans (along with collateral lending limited to certain kinds of assets).

Personalized loans require background checks on the customer where banks conduct credit checks on the borrower before handing out the loan. Crypto loans don’t require credit checks as there is the existence of collateral, in case the borrower defaults on the loan. The only requirement would be the provision of the borrower’s name and email address.

P2P Borrowing and Lending

In traditional borrowing and lending, banks act as the middleman between the borrower and the lender. To avail a loan, customers have to go to the bank and meet with a banker. Banks charge an interest of between 7% and 30% per annum to the borrower based on their creditworthiness and loan history. An interest of between 3% and 5% is given to the lender. Banks retain the residual percentages of funds between both parties.

Peer-to-Peer borrowing and lending happen in the digital marketplace where borrowers can apply for loans from investors with a mutually agreed interest rate. The transactions take place without the interference of a bank or any other third party. P2P lending can be made affordable if only there’s an element of ‘trust’ in the system, where the loans are backed by assets in the form of cryptocurrency. which differs from traditional banking characterized by high-interest rates and stringent rules regarding a customer’s financial history and credit score.

Lower Interests

As mentioned earlier, the rates of interests in crypto-backed loans are significantly low as compared to traditional bank loans. Lenders and borrowers agree on a low rate of interest, especially with the absence of banks serving as middlemen who often profit from the difference between high-interest rates charged to customers and low interest given to lenders.

No Background Checks

To avail a crypto loan, minimal background checks are required since the loans must be backed by an asset, which is used as collateral. The borrower only needs to provide his or her basic information in terms of name and email address.

Banks generally do a background check on the creditworthiness and loan history of the customer before handing out the loan, especially in the case of personalized loans. Crypto backed lending and borrowing doesn’t require extensive background checks, only a simple identification process, and assets in the form of cryptocurrency to be used as collateral.

No Lower Limit

There is no lower limit on the amount that one can borrow when it comes to crypto loans. The amount just has to be backed up by an equivalent amount of cryptocurrency, based on the Loan to Value Ratio.

Faster Processing

Unlike traditional banking where approval of a loan can take up to 7 days, borrowers of crypto loans can expect approval within as little as a few minutes. This, however, is largely dependent on the number of borrowers and lenders interested in working with the same cryptocurrency.

Crypto loans can be issued for a period of a number of days, months and even years. Borrowers can pay the full amount back before the repayment deadline without facing any penalties. This also means that they can avoid further interest payments for the remaining time period after repaying the loan.

#5Checklist before taking a Crypto-Loan

There are several key elements that a customer has to check for, in order to get the best option in terms of availing crypto backed loans.

Loan-to-Value Ratio

Loan-to-Value Ratio (LTV) can be defined in terms of a ratio of the size of a loan to the value of the value of the collateral, in this case- cryptocurrencies. It can be calculated as the amount borrowed from the lender divided by the total value of the collateral given by the borrower, expressed as a percentage.

To put it into perspective; if you borrow $80,000 for a property worth $100,000, your LTV would be 80,000/100,000, that is 80%.

A high LTV ratio means that the lender would have to provide a higher amount of money to the borrower who then has to pay this amount back. A borrower would lose his or her collateral if the crypto asset is one that is unstable and drops under the value of the amount borrowed ($80,000 in this case). This will result in the liquidation of the crypto asset.

In the case of traditional banking, collateralized lending is a risky situation for the borrower as there is a possibility of the asset reducing in value. Therefore lenders charge high interest rates or ask for mortgage insurance to be bought by the borrower.

For a Crypto-backed loan, this asset is the cryptocurrency that you own. Due to the high rate of the volatility of cryptocurrencies in the crypto market, lenders issue loans with an LTV of around 50%.

Interest Rates

Interest rates are the added amount that borrowers will have to incur on loan repayments to the lender. Interest rates have the tendency to be incremented over time, so a large time period of loan repayments will have higher interest rates.

Off the bat, banks usually provide high-interest rates since they have to account for the decrease in value of money over time. They also have ridiculously high fixed expenses, given their physical presence and large employee count.

With crypto-backed loans, these interest rates are usually very low. This is because the relationship between the borrower and the lender is almost direct. There is no third party (like banks) to restrict or dictate the flow of money between the two entities.

Loan currency

When taking a crypto-backed loan, one can present their cryptocurrency as collateral for a fiat-currency loan, mainly in US Dollars.

While taking the loan, one will have to be aware of the conversion rates that are applicable in that particular time period. They will have to be certain in terms of possessing the required amount of cryptocurrency assets to avail the loan.

For example, if you would want to take a loan of $3,300 with a 50% LTV ratio, you would require BTC worth $6,600.

Repayment options

There is an unwritten rule in the process of borrowing any amount of money that mandates the repayment of the amount to the lender within a particular time frame.

Borrowing from a bank and defaulting on the loan can present serious consequences in the case of personalized loans; including higher interest rate payments for extension periods, the damaging of one’s credit score, and even legal action by collection agencies. Defaulting on collateralized bank loans can lead to the seizure of one’s personal assets by the bank, leaving the defaulter with virtually nothing.

Many lenders prefer having their money sent back as fast as possible, and at the same time, they would like to create some interest on the loans. The faster the customer pays off the loan, the lesser he would have to spend on interest.

In terms of Crypto, many lending platforms permit no minimum time frame for repayment. This allows customers to pay back their loan in small amounts, thus freeing themselves of paying interest. Generally, there are no penalties for early repayment of a crypto-backed loan, though this might vary from company to company.

#6Defaulting on a Crypto-backed Loan

With all the benefits that crypto backed loans provide to investors, there are some issues that can affect the outcome of transactions – subject to the discretion of the borrower in terms of defaulting on the loan. In this case, however, the repercussions of loan defaulting are significantly lower than those present in traditional banking loans. The presence of collateral in the form of cryptocurrencies in the form of a smart contract solves for the problem of lenders not receiving their principal, as well as interest payments from the borrower.

Unlike almost all banks that simply start to bombard the borrower with waves of notifications and warnings about their dues and later seize the assets, crypto lenders are relatively more complex.

There are two main reasons for this complexity

Since there are virtually little to none, international or regional regulations on crypto loans at the time of writing, every crypto lender or lending company can—in theory—have their own individual policy when it comes to penalizing borrowers for defaulting on their repayments.

The Loan-To-Value(LTV) ratio of crypto can change pretty rapidly compared to conventional assets and it’s quite challenging to predict when a certain cryptocurrency may surge or purge in its value.

To put it simply, if borrowers fail to make their monthly repayments to their crypto lender, the crypto lender will most likely automatically start to liquidate the borrower’s crypto assets and use it to make the repayment for that month or week along with any other charges that are grouped with it.

The lender will continue to liquidate the borrower’s crypto assets—sometimes in increments—till the loan is completely repaid. After the loan and the interest gets entirely compensated from the liquidation of the collateral, the crypto assets that are left with the lender get sent back to the borrower.

While this generally how crypto lenders choose to penalize defaulters, it is entirely plausible—though unlikely, that a company may have a model that violently differs from the one stated above and hence the importance of reading ALL the terms and conditions about repayment, before taking the loan, cannot be overstressed.

#7Future of Crypto-backed Loans

The crypto-backed lending model in blockchain and cryptocurrencies has opened up avenues for cleaner and more efficient transactions. Both parties benefit from the transaction. Transactions are relatively more secure in crypto-backed lending in comparison to the case involving traditional banking loans; as a result of crypto loans being collateralized instead of personalized, and the low-interest rates as a result of the absence of an intermediary or middleman such as a bank or a centralized financial institution.

Crypto loans can solve for many of the problems prevalent in traditional banking loans. Loan seekers won’t have to worry about being rejected for a crypto loan, as intermediary background checks on creditworthiness and loan history are little to non-existent due to the absence of a middleman in the form of centralized banks and financial institutions. Even if a customer does have a history of bad debt, he or she will only be able to avail a loan only if they possess assets that can be used as collateral for borrowing. Collateralized lending removes the risk associated with customers defaulting on loans.

For now, crypto-backed loans seem to be a viable alternative to traditional banking loans. Since cryptocurrency trading is still at a stage of infancy, it is quickly gaining momentum as the future of digital currencies. If governments all over the world get onboard with cryptocurrencies, multiple fiat currencies might be negated completely.

How would anyone engage in p2p lending if there are no fiat currencies to provide the loans in exchange for crypto assets?

The existence of different cryptocurrencies for different purposes solves for this issue, wherein, cryptos in the form of currencies can be given as loans in exchange for crypto assets as collateral.

However, this seems like a far cry from reality because cryptocurrencies closely resemble assets as people buy them in anticipation of their values increasing over time, thus classifying them into a separate category of digital assets. The world is heavily reliant on fiat currencies for the purposes of everyday trading of goods and services. Cryptocurrencies largely want to solve for inflation as a result of governments pumping fiat money into the economy, and they solve for transactions negating the presence of a would-be intermediary.

P2P lending is multi-faceted. One aspect is the complete transparency of transactions that provides lenders with the ability to thoroughly analyze and ascertain the situation. The other aspect is the guarantee that lenders will receive their loaned amount along with the ensuing interest payment, irrespective of the borrower’s behavior. Loan-defaults are minimal because of the aspect of collateralization.

This system works best for anyone wanting to own cryptocurrencies for the mid to long-term while ensuring that their capital is usable while retaining the upside. These entities benefit from quick cash flows and loans that will act as catalysts to achieve targeted goals within one to two weeks of applying for loans on the p2p platform.

According to the business analyst, Sarah Morecambe at https://latestlawjobs.comCrypto-backed lending has a long way to go. Cryptocurrencies and blockchain technology are yet to be fully embraced by various nations all over the world, some of whom are still extremely skeptical about this type of trading and its underlying technology.

Since banks and other financial institutions are still largely dominating the economic framework, it is difficult to predict exactly what the future holds for crypto backed loans. However, the current state of crypto loans can provide a roadmap for where this type of borrowing and lending will take us.