Jamie Knowles, Director of Institutional Sales at Galaxy Digital, and Leeor Groen, Managing Director at The Spartan Group discuss the crypto’s institutional lending market. They identify the challenges and opportunities of the current crypto lending markets and how to restore trust and reduce counterparty risks in the ecosystem.
Failure of Actors Doesn’t Mean Failure of Crypto
Institutional lending in crypto has rapidly evolved in the past two years, with a growing willingness to use collateralized or uncollateralized lending products. Despite challenges faced in 2022, Leeor believes that it is not a failure of crypto or the ecosystem, but the failure of malicious actors.
The technological foundation that allows users to participate in decentralized finance (DeFi), borrowing, and lending pools has stood the test of time and remains resilient. In his opinion, the industry hasn’t experienced a technological implosion.
Restore Trust & Reduce Counterparty Risks Are Essential
Jamie identifies the huge counterparty risks in the industry over the past 12 months. There has been a significant drawdown in institutional loans on a notional basis. Both the demand and supply side of institutional lending in crypto has decreased due to the exit of some of the biggest players and many potential lenders.
Remaining lenders have become increasingly worried about counterparty risks and have pulled back significantly. They start to demand high collateralization levels that many borrowers are not willing to meet.
Leeor thinks that the industry needs to implement proper due diligence processes and standardized frameworks to evaluate counterparty risks. This includes asking fundamental questions about who the counterparty is, how many other people they are taking money from, and what their track record is.
Standardization of diligence processes will ensure that all parties are on the same page and will reduce the likelihood of surprises. Leeor believes that by building connections, the industry can create critical infrastructure pieces that will be the foundation of the next wave of growth.
To restore trust in the ecosystem, Jamie thinks that the market needs time to recover. It’s important to implement better risk management practices and improve infrastructure for real-time monitoring. Zero-knowledge (ZK) technology is a potential technology to protect privacy.
Bringing Institutional Players Into Crypto Lending
Leeor believes that lending and borrowing in DeFi is still in its infancy, but there is potential for significant growth. He thinks that the composability of liquidity is one of the biggest enablers to unlocking assets flowing into the crypto space.
To bring traditional financial (TradFi) institutions to participate in DeFi, Leeor suggests that the basic infrastructure needs to be developed to allow them to participate in a meaningful way.
