Live From DAS: The Return of Bitcoin-Backed Lending | John Glover

Transcript

I think really what we're working on is not to do anything that's groundbreaking. We're just working on bringing more traditional finance type products into this industry. Um, and doing that in a very simple way. We we've we're big believers that the best restaurants have the smallest menus. We're trying to be very focused on being the best Bitcoin back lender into the space. Nothing said on Zox Research is a recommendation to buy or sell securities or tokens. This podcast is forformational purposes only and any views expressed by anyone on the show are solely our opinions, not financial advice. Pokio, Ryan, and our guests may hold positions in the company's funds or projects discussed. Okay, John, let's just kick it off quickly. Quick intro

about yourself. Quick intro about Letin. Sure. My name is John Glover. I'm the CIO of Letin. Uh, Leen is a first and foremost a lender of dollars against Bitcoin uh and ETH collateral to the retail sector globally. Um, but we also on the other side of that need to fund that book. So, we are also a very big borrower of dollars backed by Bitcoin. Perfect. Let's let's just start it simple, right? Why Bitcoin? What what makes Bitcoin this pristine collateral for this kind of job? Well, I come from uh many many years in Tradfi as a lot of us do and uh when I look at the collateral that we were accepting when I was in the banking world, they were things like tea bills or stocks or other uh asset classes that had distinct

trading hours. So, they were open from, you know, 9:30 to 4:30 Monday to Friday, no holidays, closed on weekends, closed in the evenings. Um, and so you had price gap risk and when you're accepting that as collateral and you have a liquidation threshold, you've got this gap risk that you know someone you've got Tesla stock that you've taken as collateral and Elon does something crazy over the weekend and Tesla opens 10% lower and now you're exposed to this this potential loss. Um, so Bitcoin has 247 365 markets, very very deep and growing liquidity. Um, so you just don't have that exposure to uh, you know, something going wrong when you're sleeping and the market's closed, you

know. Yeah. Okay, perfect. Makes sense. So, how about you give us a more holistic view of the Bitcoin lending space in general, how we've come from a couple years ago from the, you know, the Celsiuses and the Blockfires of the world to where we are now. Yeah, I mean, it's been a really interesting journey, especially for, you know, for someone who already had a lot of gray hair to start. I've got a lot more since I got here. But um so when when I joined uh Leen, I was I was hired to help with the risk management of the firm. Um and when I looked at what some of our competitors were doing, it was really concerning to me. Um because they were paying yield on tokens that didn't have an institutional lending market. So there was no way to

generate yield on the tokens that they're paying yield on. Um, we saw we were approached by people like Three Arrows Capital to lend them money, but they wouldn't share financial statements. They wouldn't they weren't transparent at all about their uh their creditworthiness. So, we didn't lend to them, but our competitors were. So, there were a lot of concerns that I had in the the way the market was growing. Um, and I've got just this little anecdote to tell. Um, there we had a board meeting where one of the board members said, "Why is Leen not as big as BlockFi?" And I said, 'I have no idea how they're as big as they are because we're growing as quickly as we can and they're growing 10 times faster. They can only be doing that through taking

risk. Um, and then it was like eight months later that everything blew up and Blockby went out of business and we remained in business because we just did not I'm not even saying it was groundbreaking risk management. It was just traditional smart risk management in credit underwriting, in market exposure, in making sure that we were very transparent to our clients and what they were doing in protecting our own balance sheet and protecting our clients assets. And so we were able to survive. But what happened when Celsius and BlockFi and Genesis and Voyager all went bankrupt is trust left um for a long time. And so we suffered from that because people thought that we

may be the next BlockFi. So we saw our uh retail loan book go from about I think at the time it was around 300 million in outstanding loans to about 45 million because people just paid back their loans because they were nervous about losing their collateral like you know some others did at Blockfire Genesis or um uh Celsius. And so it was a matter of building back up that trust. Um, and also we knew that since we survived and we did things the right way, as long as we could stick around long enough for the wave to come back in that we would do well. Um, and so what happened in March of last year when everything kind of took off again, uh, we saw our loan book grow and we're now

almost double what our maximum loan book size was prior prior to the, uh, the events of FTX and and Alamade, etc. So, it's been very good. Been very good. It's always sad to hear and it's a very common theme in the space where the bad actors, malicious or otherwise, end up taking down the rest of the space with them, especially reputational wise. But, um, let's dive a little bit deeper. So, how does your Bitcoin back loans differ from a traditional loan that most of us are used to here? Um, really not that different from, you know, we're not trying to reinvent uh the wheel here.

We're just trying to bring traditional financial products into the digital asset space. And it's very easy from a North American perspective to just go, well, you know, if you need money, why don't you just borrow it from the bank? Um, well, first off, we've got a lot of clients who are really digital asset rich, but don't have a lot of real world assets or even really high incomes. Um, and they can't borrow against their Bitcoin collateral at a traditional institution. So, that's a big portion of our book. But, it's just like taking out a loan against your car or against your a mortgage against your house. You're just taking out a mortgage against your Bitcoin. Um and then if we look at you know our Latin American client base which is quite a large portion of our of our exposure um they don't have access

to traditional financial institutions period even if they have other assets they just can't borrow against them because that's really for the wealthy in some of those countries and so that's another place they come to let to access their to unlock some of the wealth that they have in their Bitcoin just to pay bills or to buy a car or to pay for the kids' education or to go on holiday or in North America to start a business or to buy a house etc. So um it's really to go to your question of how does it differ from traditional lending products it really isn't different but it does have that pristine nature of the collateral. So it's quite a safe uh it's quite a safe lending protocol. Okay, that makes sense. It's not it's not a

different loan process. It's more that the collateral itself is more inclusive permissionless global. Okay, makes sense. But and a faster loan process, right? And 24/7 transparent, right? And okay, so on that note, who So you you mentioned Latin America, let let's talk more about your customers like who who else are there? Is it is it institutions, hedge funds, retail, and like what what are the typical loans that they're coming to you for? What are the purposes of this? Yeah, let's just tackle that. So we we've got a number of different kind of cohorts of of lender of borrowers at Lein. So we have our minimum loan size is $500. So we are retail focused primarily. Our average loan size is around somewhere under $50,000 but we have you know tens of

thousands of these loans outstanding. Um we also have loans up to I think our highest loan right now is 5 million or $7 million in in notional. So it's a lot of high net worth individuals. It's a lot of retail clients. We have some corporate clients now that have treasury that they want to borrow against. they want to put that to work. Um, and they are in I think 122 countries around the world. So, it's very diverse. Uh, you asked about use cases. It's kind of what I was talking about. It's to pay for their kids' education. It's to, uh, you know, rent a bigger apartment. It's to buy a car, go on a vacation, in some cases, buy property, or to invest in other asset classes. So, take out a

dollar loan and invest it into traditional asset classes. And then with these customers, are they how long is these typical loans? Are they repeat customers? Are they coming off other services? Like can you go more into that? Sure. So our all of our loans are a one-year term, but you can repay at any time without penalty because consumer lending laws require that. Um our average loan duration is around 160 days. Um but we have loans that are much longer. Some people will just renew their loan every year um because they still have need of the asset and their value of their collateral keeps going up so they can take more loans against the collateral that they have. Um so it's really it's really varied but we do see

um our average client takes out about 1.3 loans per year. So even those that are getting paid back they tend to take out another loan later in the year as they need it. And is that is that growing? Is that number trending upward? 1.3. Um it has been growing um which is great. because we want to make sure that our clients are getting as much utility as possible as they can, but also as I mentioned, as the value of their collateral goes up, they've got additional collateral they can take out a loan against. So, they'll add to their loan balance by just taking out a second loan against the existing collateral that they have. Okay. Very interesting.

So, how how are you funding the both how is it being funded? The demand side of this and the supply side. So, I said we've got kind of two facets of our business. We have the retail side, which is really where the vast majority of our dollars go to the retail lending, but we need to fund that. So, we have a couple methods that we can fund. We have growth accounts. We call them growth accounts. It's like a savings account. Um, where you can put USDC or USDT on deposit with us and we'll pay you a yield for that. The way we generate that yield is lending to our retail clients in an over collateralized basis. That's one small source of funding. It used to be quite large when we could offer that in the US and Canada. We can't do that uh anymore. So

we that's only maybe maybe 15% of our book is funded through that. Um the rest of our book is funded through bilateral loan agreements with larger players that are um wholesale lenders into the space. So we overcolateralized to them with Bitcoin and we use that to fund our retail loan book. Um, one name that's public that we can talk about is Signum Bank out of Switzerland. They did a syndicate the the world's first syndicated Bitcoin back loan uh was done for us and so that's one of our sources of funding and we have other counterparties like that. And and you mentioned you're not allowed to do those similar loans in the US and Canada anymore. The savings accounts can't offer savings accounts. Yeah. Do you

expect that to change anytime soon given this new administration? I would I would think that it probably will change. Um, and you know, hopefully it does because it gives people access to higher yield on their dollars. Um, we had there's a ratings agency in the crypto space called AIO ratings. We had them rate our business. They rated us at A minus, which is like investment grade. Um, so it gives people confidence that this is a safe way to generate yield on their dollar. So hopefully we'll be able to offer that again in the US at some point.

And I assume when they did this this rating this methodology, they looked at your I guess your risk methodology, how you would require rebalancing of collateral based on LTV. Is it can you go a little bit more into into this risk methodology that you have? Sure. So all of our retail loans start at a 50% LTV. So if you want to borrow $100,000, you need to put on deposit with us $200,000 worth of Bitcoin. Um, once that LTV hits 70%, our clients get an automatic notification that their loan is getting into liquidation territory. So, you may want to add more collateral or pay down part of your loan, but get that into a healthier territory. Um, all of our loans are uh they're measured for uh LTV

every 60 seconds, 247. As soon as that LTV hits 80%, we liquidate their collateral in a sufficient amount to repay the principal and acred interest. The loan gets repaid. The balance of the uh Bitcoin collateral is then given back to the client. Um we've done $1.2 billion worth of uh retail loans um across I think 57,000 or 60,000 individual loans. And we've never lost a penny or Satoshi on any of the loans because of that methodology. I never lost a Satoshi. That should be that should be the slogan there. That's a great track record. Um, okay, that's great. Coming up on time, I want to circle back to the first question, right? Bitcoin as the pristine asset.

You all are Bitcoinbacked lender. Let me ask this in a kind of funny way. Are you all Bitcoin maxis? Do you all see yourself offering these similar products on any other asset besides Bitcoin? Perhaps Ethereum, perhaps something else later down the line? What are your thoughts there? Um, first off, I wouldn't say that we're all Bitcoin maxis, although we do have some Bitcoin maxis in the company for sure. Um, but uh, no, I think we we're all uh we're all big believers in digital assets, very big believers in Bitcoin, um, but more believers that we should be able to level the financial playing field around the world and give people access to financial products. To your question on will we accept other assets as they'd rather do that than post it as

collateral. So they're happy to keep their Bitcoin intact. Um they don't want to wrap it and put it onto DeFi. They just rather keep it intact posted as collateral and borrow against that. No, that makes sense. I mean for Bitcoin, there's no as of yet there's no Bitcoin DeFi. There's no way that you can trustlessly just put your asset and earn yield in it. So I mean Ethereum, there's some alternatives. For your Ethereum product though, do you have different loan to value ratios? Is it is it more volatile? Is it the same exact Yeah. No, it's all the same. We plug it into our same technology and uh as I said we've never had a loss from that. The the volatility of Ethereum is not high enough to concern us that our tech's not correct for that. And then in a similar vein in

the future I mean there's teams working on Bitcoin DeFi right through these L2s through these other chains. Do you do you see that will create more demand in general for Bitcoin lending? Do you see this as a competitor? I mean how do you view that? Well, I mean already there is there's competition from DeFi lending. We think that it's very different subset of clients who are interested in that. I think once if Bitcoin truly can be used onchain as collateral in the DeFi space without changing its formation. So without wrapping it, without having to bridge to another protocol, um I think that will open up more uh demand and there will be people who would rather do it in that fashion. I think the the difference from a CFI lending

perspective and the clients that deal with us is they want to make sure that it's uh that there is AML KYC and then they're not going to fall foul of any kind of regulatory or tax implications. So I think there's a place for both. Um but we'll see when that really develops and we'll see how it works out. Also you give me giving me your thoughts here. I think another hindrance with DeFi lending is that the rates are all variable and they can change as quickly as the cryp crypto markets change on a weekly basis. So I I don't know if you have thoughts on that. Yeah, for sure. I know there are some uh there's some projects that are being worked on for fixedterm fixed rate uh lending that's going on now. That's really just more of a a matching book and find people who

are willing to borrow at those rates and lend at those rates. Um yeah, variable rate is definitely challenging for people. People want the certainty of knowing exactly what they're going to have to pay month- on-month if they have to. By the way, you don't have to pay monthly interest to us. It's all bullet payment at the end. Um, which is one of the big differences with ourselves and our competitor. But people want to know that um get that certainty. So, I think that until that market develops more, there'll be more demand probably for the CFI space where it's fixed. So, when you borrow from us, you know exactly what your interest rate is. you can pay that back whenever you like, but you know that for the next year that interest rate is not changing. Okay. And last

question here. What are the um what are the big plans Linen has over the next year? You know, what are you what are you bringing to the space? Well, we're do we're we've got some plans on the funding side, which um I I'll be excited to announce when it's done, but it's we're not there yet because one of the biggest challenges for everyone in this space is access to dollars. And I think the last panel talked about that a little bit. We've developed some really great funding relationships with really strong partners, but the rates are still relatively high for an investment grade borrower like ourselves. Um, if we were to be doing this in Tradfi, we'd be paying five 5% 5 and a half% for dollars. We're paying a lot more than that uh for dollars because there's just not access yet. What we're working on is

going to be unlocking that for us in the Tradfi space, which is really exciting. So, that'll be announced at some point. Um, and the I I think really what we're working on is not to do anything that's groundbreaking. We're just working on bringing more traditional finance type products into this industry. Um, and doing that in a very simple way. We we've we're big believers that the best restaurants have the smallest menus. We're trying to be very focused on being the best Bitcoin back lender into the space, but adding things like uh auto topup features so that if you are getting to that, you know, 70 75% LTV, you can automatically have your Bitcoin that you've got with us moved over into your collateral pool. Um because once it

gets in the collateral pool, it's locked in there until uh so you don't necessarily want to overcolateralize beyond what you have to. But if you've got excess Bitcoin, you can have that sitting in a transaction account as we call it and it'll automatically go and top up your Bitcoin collateral so that your loan becomes healthy again. So things like that that are facilitating um ease of management for our clients is that's the kind of things we're working on. Okay, great. Perfecting whether it exists. Love it. Everybody, thank you John for your expertise. Thank you very much everyone. [Music]