Preparing for the future
21 August 2018
Is the securities lending industry gearing up for the widespread adoption of blockchain as the default mechanism for the issuance and transacting of securities?
Image: Shutterstock
Lendingblock, a digital asset lending exchange platform for fully collateralised cryptocurrency, claims to be the first company to bring cross-blockchain lending to the crypto world.
The company aims to build on the existing securities lending platform to create a “simpler, and more transparent version of securities lending than the one that currently exists”, according to its co-founder, Steve Swain.
Swain says that, in simple terms, the company is a securities lending platform for digital assets such as bitcoin, but he also sees it as a “once-in-a-lifetime opportunity to build something from scratch on a blank sheet of paper”.
“Our team is largely from a conventional financial services background, and we saw the opportunity to create a critical foundation stone of an emerging and exciting new financial services ecosystem.”
Asked if the company represents a logical progression of blockchain into the securities lending industry, Swain replies: “In some ways, but more the opposite; it’s the move of securities lending into the blockchain-based financial industry.”
While it will have nothing to do with the lending/borrowing of traditional securities, Swain and his colleagues believe that two key developments are inevitable: firstly, that many existing digital assets will be regulated as securities, and secondly, that there will be a widespread adoption of blockchain as the default mechanism for issuance and transacting of securities.
“It’s this future that we are preparing for,” he says, “we believe that securities lending plays a critical role in the functioning of an efficient capital market and many, though not all, of the same benefits for borrowers and lenders exist. We do think, however, that the market we are creating can be much leaner and more efficient than the existing securities lending market.”
“You don’t have to be a zealot to see the potential of digital assets,” he explained.
“The vast majority of transactions in conventional financial systems are purely digital with no physical settlement. What we are doing is genuinely innovative, and we are pushing the limits or limitations of existing technology, law, and financial markets.”
He describes the market reaction to Lendingblock’s arrival on the scene as overwhelmingly positive.
“The number one question we have been asked by prospective clients is ‘how soon can you be live?’, which is obviously encouraging,” he said.
But is blockchain just an overhyped buzzword? Or could it revolutionise the broader securities lending business and indeed much of human activity?
Answering these questions, Swain says: “We recognise many of the problems in the broader securities lending business, but our focus is not to try to fix them.”
“As a team, we are focused on building a better version in the belief that the future is digital.”
“Blockchain is helping to make systems across practically all sectors more efficient already, including traditional banking and the transfer of humanitarian aid, so it’s not just a buzzword without application or function, but rather something that will shortly see mass market applications.”
In a previous interview, M Damian Billy, the founder and CEO of Illinois-based Econophy Group, raised a number of issues, including a question on how, with Bitcoin approaching a decline of 70 percent in value, would Lendingblock intend to maintain any collateral relationship.
Responding, Swain explains: “Correlation between digital assets is relatively speaking very high, and given our model is crypto loans secured by crypto collateral, the level of collateralisation required is significantly less than if loans were collateralised against fiat currencies.”
Billy also asked: “Since there are two transactions involved (lending and borrowing), are there two fees involved? If someone is going to lend their tokens, they would expect some return on investment. If someone is the conduit for borrowing, they are going to charge a fee for the transaction.”
Swain confirmed that Lendingblock takes a fee from both borrower and lender. On an annualised basis this is 1.5 percent, split 2:1 borrower:lender. For example, if a loan is made at 10 percent, the borrower pays 11 percent and the lender receives 9.5 percent, he explained.
Billy asked that if the pledged token loses value, is there a margin call by the lender? Swain answers: “We actively margin call borrowers on a 24/7 basis.”
Billy noted that many of the blockchain-related concepts and technologies are yet to be proven at best. He said: “As some are nascent, how do you establish a hierarchy of what tokens can be pledged? Or is it all based on a good faith basis that the entire initial coin offering (ICO) complex does not go to hell in a handbasket?”
Swain says: “For collateral, we will only initially accept the ‘blue chip’ assets, specifically the top five by market cap and trading volume. Over time we will carefully consider extending this where we can do so in a way that doesn’t compromise the protection to lenders.”
Billy asked that with some institutional interest coming into the market, would Lendingblock be supportive or be counterproductive to stabilise any lending versus borrowing activity?
Steve Swain replies: “We see strong institutional loan supply and demand, and also think that there will be an active market in identifying inefficiencies and inconsistencies, which should have a steadying effect.”
Billy said that as criminal activity is rampant, where or what are the risk-management controls? Who decides? Is there any regulatory oversight?
Swain explains: “We are strongly focused on working with regulators, as we believe in the importance of trustworthy markets and market participants. Only through regulation are we going to reach the level of trust that is needed for the development of our sector.”
Billy said: “From what I have read, there are a handful of individuals that control upwards of 70 percent of the Bitcoin market and other ICOs, how do you defend a transaction that cannot be controlled internally?”
Swain replies simply: “I don’t believe this is true.”
Billy asked: “Will it be a one to one transaction relationship between the lender and borrower or will a skewed equity relationship exist between the two sides of the transaction? Are there more lenders than borrowers or vice versa?”
Swain replies: “Our loans can be syndicated across multiple lenders. For example, one borrower may have its loan request filled by more than one lender based on best offers in our order book.
This transparent “best execution” model is a significant improvement on existing opaque securities lending processes.”
“If the token loses 10 percent, 20 percent or 30 percent of value, where and who has the liability for paying off the loan?” asked Billy, “is the borrower required to add more tokens as collateral?”
Swain says that all loans are over-collateralised, based purely on the principal/collateral correlation. If the collateral value drops below the defined collateral floor, the borrower is required to provide more collateral.
“If they do not do so, their collateral position is liquidated to cover their obligation to the lender,” he adds.
“Can the loan be called due to a market price drop?” asked Billy.
Swain says the answer is no, though the collateral management process described above applies.
“Is there ever a point in the lender versus borrower relationship where the market environment would just negate it?”
asked Billy.
Swain replies that if the borrower does not meet any obligations they enter into default. Given that there is an enforceable legal contract in place, this would have serious repercussions, he says.
For his last salvo, Billy said: “Everything is fine when things are positive, what happens when neither side controls market movement and the token pricing collapses? Does the lender just seize the borrower’s collateral?”
Swain explains: “Lendingblock acts as an agent for the lenders, and is empowered to liquidate collateral to purchase the principal obligation from borrower to lender.”
The company aims to build on the existing securities lending platform to create a “simpler, and more transparent version of securities lending than the one that currently exists”, according to its co-founder, Steve Swain.
Swain says that, in simple terms, the company is a securities lending platform for digital assets such as bitcoin, but he also sees it as a “once-in-a-lifetime opportunity to build something from scratch on a blank sheet of paper”.
“Our team is largely from a conventional financial services background, and we saw the opportunity to create a critical foundation stone of an emerging and exciting new financial services ecosystem.”
Asked if the company represents a logical progression of blockchain into the securities lending industry, Swain replies: “In some ways, but more the opposite; it’s the move of securities lending into the blockchain-based financial industry.”
While it will have nothing to do with the lending/borrowing of traditional securities, Swain and his colleagues believe that two key developments are inevitable: firstly, that many existing digital assets will be regulated as securities, and secondly, that there will be a widespread adoption of blockchain as the default mechanism for issuance and transacting of securities.
“It’s this future that we are preparing for,” he says, “we believe that securities lending plays a critical role in the functioning of an efficient capital market and many, though not all, of the same benefits for borrowers and lenders exist. We do think, however, that the market we are creating can be much leaner and more efficient than the existing securities lending market.”
“You don’t have to be a zealot to see the potential of digital assets,” he explained.
“The vast majority of transactions in conventional financial systems are purely digital with no physical settlement. What we are doing is genuinely innovative, and we are pushing the limits or limitations of existing technology, law, and financial markets.”
He describes the market reaction to Lendingblock’s arrival on the scene as overwhelmingly positive.
“The number one question we have been asked by prospective clients is ‘how soon can you be live?’, which is obviously encouraging,” he said.
But is blockchain just an overhyped buzzword? Or could it revolutionise the broader securities lending business and indeed much of human activity?
Answering these questions, Swain says: “We recognise many of the problems in the broader securities lending business, but our focus is not to try to fix them.”
“As a team, we are focused on building a better version in the belief that the future is digital.”
“Blockchain is helping to make systems across practically all sectors more efficient already, including traditional banking and the transfer of humanitarian aid, so it’s not just a buzzword without application or function, but rather something that will shortly see mass market applications.”
In a previous interview, M Damian Billy, the founder and CEO of Illinois-based Econophy Group, raised a number of issues, including a question on how, with Bitcoin approaching a decline of 70 percent in value, would Lendingblock intend to maintain any collateral relationship.
Responding, Swain explains: “Correlation between digital assets is relatively speaking very high, and given our model is crypto loans secured by crypto collateral, the level of collateralisation required is significantly less than if loans were collateralised against fiat currencies.”
Billy also asked: “Since there are two transactions involved (lending and borrowing), are there two fees involved? If someone is going to lend their tokens, they would expect some return on investment. If someone is the conduit for borrowing, they are going to charge a fee for the transaction.”
Swain confirmed that Lendingblock takes a fee from both borrower and lender. On an annualised basis this is 1.5 percent, split 2:1 borrower:lender. For example, if a loan is made at 10 percent, the borrower pays 11 percent and the lender receives 9.5 percent, he explained.
Billy asked that if the pledged token loses value, is there a margin call by the lender? Swain answers: “We actively margin call borrowers on a 24/7 basis.”
Billy noted that many of the blockchain-related concepts and technologies are yet to be proven at best. He said: “As some are nascent, how do you establish a hierarchy of what tokens can be pledged? Or is it all based on a good faith basis that the entire initial coin offering (ICO) complex does not go to hell in a handbasket?”
Swain says: “For collateral, we will only initially accept the ‘blue chip’ assets, specifically the top five by market cap and trading volume. Over time we will carefully consider extending this where we can do so in a way that doesn’t compromise the protection to lenders.”
Billy asked that with some institutional interest coming into the market, would Lendingblock be supportive or be counterproductive to stabilise any lending versus borrowing activity?
Steve Swain replies: “We see strong institutional loan supply and demand, and also think that there will be an active market in identifying inefficiencies and inconsistencies, which should have a steadying effect.”
Billy said that as criminal activity is rampant, where or what are the risk-management controls? Who decides? Is there any regulatory oversight?
Swain explains: “We are strongly focused on working with regulators, as we believe in the importance of trustworthy markets and market participants. Only through regulation are we going to reach the level of trust that is needed for the development of our sector.”
Billy said: “From what I have read, there are a handful of individuals that control upwards of 70 percent of the Bitcoin market and other ICOs, how do you defend a transaction that cannot be controlled internally?”
Swain replies simply: “I don’t believe this is true.”
Billy asked: “Will it be a one to one transaction relationship between the lender and borrower or will a skewed equity relationship exist between the two sides of the transaction? Are there more lenders than borrowers or vice versa?”
Swain replies: “Our loans can be syndicated across multiple lenders. For example, one borrower may have its loan request filled by more than one lender based on best offers in our order book.
This transparent “best execution” model is a significant improvement on existing opaque securities lending processes.”
“If the token loses 10 percent, 20 percent or 30 percent of value, where and who has the liability for paying off the loan?” asked Billy, “is the borrower required to add more tokens as collateral?”
Swain says that all loans are over-collateralised, based purely on the principal/collateral correlation. If the collateral value drops below the defined collateral floor, the borrower is required to provide more collateral.
“If they do not do so, their collateral position is liquidated to cover their obligation to the lender,” he adds.
“Can the loan be called due to a market price drop?” asked Billy.
Swain says the answer is no, though the collateral management process described above applies.
“Is there ever a point in the lender versus borrower relationship where the market environment would just negate it?”
asked Billy.
Swain replies that if the borrower does not meet any obligations they enter into default. Given that there is an enforceable legal contract in place, this would have serious repercussions, he says.
For his last salvo, Billy said: “Everything is fine when things are positive, what happens when neither side controls market movement and the token pricing collapses? Does the lender just seize the borrower’s collateral?”
Swain explains: “Lendingblock acts as an agent for the lenders, and is empowered to liquidate collateral to purchase the principal obligation from borrower to lender.”
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