Cryptocurrency and Lending

Ashley Garrison: Hello, everyone. Ashley Garrison here again with Brian Peckinpaugh and David Catalano for Baker Hill’s second episode of Lending Made Easy. 

This time, we’re going to be talking about cryptocurrency, a big buzz and every news outlet that you see. But, really the question is around will cryptocurrency enter into the lending space? Will there be crypto lending? 

So, with that, I’ll turn it over to Brian and David to get your initial thoughts on the crypto lending concept. And, where do you think traditional banks and credit unions are going to go with this, this in the future?

Bryan Peckinpaugh: Really timely topic, Ashley. You know, I know we’ll get into lots of different aspects, but one of which will be the whole world of decentralized finance and lending against crypto assets. And I don’t know, David, did you see that massive attack where $120 million just disappeared into the ether?

David Catalano: I didn’t see that. Do you know which currency that was?

Bryan Peckinpaugh: So it was actually one of the decentralized platforms. Badger Dao is the, the name of the, the decentralized finance—or DeFi—platform. 

So that’s one of those where you can use your crypto assets as backing to get loans from that provider. And, they were hacked. The blockchain broken, and the attackers were able to walk off with about 120 million bucks before they figured out what was happening and they were able to shut it down, which, you know, to me, it gets to the heart of this whole issue where, until we have some protection and regulation, it’s a scary market to be in. 

I realize the returns are great and there’s a lots of interest and buzz and rightfully so around the cryptocurrency world. But you know, something like that, where a platform can be hacked $120 million lost and at least last I saw no real recourse to get it back as opposed to continuing to work with your local financial institution where all of those assets are federally insured. 

That’s a big bridge to figure out how to get across before we see massive adoption. 

David Catalano: Yeah. I don’t know much about that platform but it would shock me if Ethereum was broken into, you know, what’s weird about the word cryptocurrency is that crypto is not a currency. It doesn’t have the requirements of a currency. It’s a commodity then, like, natural gas. 

If you’ve followed that in the last two to three months, it’s wild. Wildly volatile, right? So you can’t have something called a currency, and I can buy my groceries with a currency this week. Then, next week, I can’t [ buy groceries] because my currency went down in value that much, then—by definition—it can’t be a currency.

Last Saturday, Bitcoin trades on a Saturday, it was $57,000. It closed at $53,000. So it’s 6% move in a day. The next day, close to $48,000. That’s another 8.5% down. So 6% followed by 8.5%. That the level of volatility in crypto is far too great to be considered a currency. 

Now, could it be a currency in the future? Potentially. It could be a world currency. You can’t print more Bitcoin. 

In America we’ve been printing dollars like it’s going out of style, which is creating inflation, devaluing and harming the lower ends of the population with respect to their economic standing. You don’t do that with crypto, right? It’s like being on the gold standard. You just can’t invent more crypto. It’s not how that works. So could it be a currency in the future? The volatility would have to get wiped out, like other currencies. They move around, but they don’t move around like that.

Now what’s really interesting about crypto is if you look at the internet adoption curve from 1990 to 1998. Think about that curve—and, that’s the users from 1990 to 1998 during mass adoption of the internet—is the exact same curve as crypto between 2014 and 2022. The adoption of crypto is mirroring the adoption of the internet. It’s that network effect, I guess, is what I would consider that to be. It’s spawning all sorts of ecosystems—like Coinbase—and chip makers—like AMD—who are all beneficiaries of that. 

If you think about Coinbase, there’s eight and a half transacting users a month in the second quarter of 2021. But, the bigger number of years, that’s up 487% year over year. The adoption rate of crypto is phenomenal, and it’s mirroring that of the internet. This is a wave to hop on. 

I think it’s not a currency. I don’t think I want to lend against the assets since it gets really, really volatile, but it’s definitely a place to study and to learn more about, and to get involved in, and to, to figure out, you know, how you can make money in this space because the adoption is here the way the adoption was for the internet.

Bryan Peckinpaugh: Absolutely, yeah. What’s interesting—and, again, it’s a little bit scary to me—especially in the consumer space, right David? 

There’s a lot of value in cryptocurrency or whatever you want to call it ideas in that it does provide financial vehicles for the unbanked or underbanked. That can be both good and bad. That can be serving people who truly need to be served. That can also be serving people who aren’t served by traditional banks for good reasons, right. 

Maybe they’re in illicit activity whatever it might be that they shouldn’t be banked. They have that opportunity to have access to financial instruments through the world of crypto. But, it almost kind of hearkens me back to RobinHood a few months ago where we can see what happens when you provide unsophisticated consumers, as it relates to access to very sophisticated financial instruments. 

Think about the people who were trying to teach themselves options trading on RobinHood and how badly that went for some. And I worry, what does that do combining unsophisticated consumers with an incredibly volatile asset and trying to put those a together again especially as you think about digital lending, where, like you said, my asset could be worth $58,000 today and $48,000 in two days.

Then, all of a sudden, the loan is called because I have nowhere near the necessary liquidity or they start selling off my assets to recoup their loan. It worries me a bit to a certain extent, these are designed for those not consuming traditional financial instruments.

David Catalano: Yeah, I would agree with that. The last thing we need are people that can’t go to a bank to go to crypto because they’re typically economically challenged. 

To me, that doesn’t make a whole lot of sense, but the technology underneath crypto is kind of cool. Non-fungible tokens (NFTs) are an example of that, you know, where you’re taking your very unique asset, and uniquely identifying its owner or authenticating it and those things have been going crazy with valuations. 

Some of them are silly, like baseball cards. Joe Bonamassa put 58 Les Paul amp, which I think is pretty cool. But, at the end of the day, he made it a non fungible token and sold it.  Yeah. You know, I suspect it goes up in value all the time.

There’s a lot to be said for the technology and I think there’s a huge future here. Well, the, the reason why banks are getting involved is because people, in general, trust their bank. They want to buy the crypto asset from their bank. 

The banks then partner up with somebody who can then house those crypto assets and as long as nothing ever happens, then their bank brand is safe and their client relationship. That’s what’s happening here and there’s a little fee to be made as a result of that, but that’s just a service they’re providing as a result of the demand by the consumer to purchase and hold crypto assets or particular cryptocurrencies, like a Bitcoin.

Bryan Peckinpaugh: Yeah.

Ashley Garrison: I was just going to say it’s interesting because things are so highly regulated. Here you have the cryptocurrency world where the beauty of it is the lack of regulation. How the two are going to meet somewhere along the line will be very interesting. Will crypto still have the appeal of the non-regulated type of field that I think attracts a lot of people?

Bryan Peckinpaugh: Yeah. And the more that it extends into those worlds, the more it’s used as an asset to back a loan, the more it’s going to be treated holistically as an asset. That’s where you start to see the SEC and other regulatory bodies getting involved because why should my crypto investment be treated any different than my stock portfolio? If I’m using both of those to secure other financial instruments, now everybody’s really keen to understand what’s behind them. 

I think the more it broadens in scope as to what it’s used for the more regulatory scrutiny will be put on it and that’s where we’ll start to see some, maybe shifts in behavior and trends, but I’m a firm believer in the blockchain doing some research for this. 

Reuters pointed out a few years back that the technology itself, that blockchain idea, David, what you were talking about with being able to prove ownership and secure transactions has the opportunity to cut $12 billion in savings out of the infrastructure costs of corporations in the United States, which I think is probably undervalued. I think it could be way more than that when you start to think about the applications of it. 

We’ll continue to see those ideas, whether it’s the blockchain fundamentally—or the application of cryptocurrencies—and using it as assets in lending and other crypto assets that’ll continue to come, but I think that will also bring the regulatory thing. 

But, David, in the last episode where Ashley asked, “Is Starbucks a Bank?,” you talked about affinity bias as you were talking about tying the behavior of the dollars on a Starbucks card to how I spend in store when it’s not a real dollar. It’s not something in my pocket. 

What do you think that could do as, as it relates to the world of cryptocurrencies and crypto assets? Do you think that there’ll be a similar affinity bias there, kind of compounding that effect of the unsophisticated financial consumer? Are they going to be just generally inclined to be more risky with those assets because it’s not a dollar bill?

David Catalano: Yeah, I mean, if we look at August, I think it was around August where Bitcoin had dropped maybe 40,000 or 37,000, and now it’s back up to this recent drop, call it 50,000. 

With that kind of found money, you get back to that mental accounting problem where someone says, oh, this is found money. I can go and spend it frivolously, which makes no sense at all. 

A dollar is a dollar is a dollar, a Bitcoin is a Bitcoin is a Bitcoin. So that makes to me, it’s definitely possible and highly probable, especially with an unsophisticated person, well actually with any human you’re suspect to that.

But, I think the bigger enemy of crypto is the federal government and the federal government prints money. They have a money printing machine, and when you can print money, you can solve a lot of your current problems. I can issue checks to people. I can put money on debit cards for people. I can do all sorts of things if I could print my own money. I can make my debt payments, all sorts of good things. 

If crypto is that currency, all that goes away, no value in that because you can’t create that. So that’s a problem. And I don’t see the government, you know, they’re going to want to investigate it.

They’re going to want to regulate it, but they’re not going to want to adopt it in any kind of mass way anytime soon. That’s just my take on it. Just looking at their behaviors. 

Ashley Garrison: David, Brian, cryptocurrency and lending is certainly an interesting topic. I think we could talk about this for a very long time, and I’m sure in subsequent episodes we will probably come back because I think crypto loans are here to stay, and it’s just going to be interesting over the next 12 months to see what happens in this space with crypto lending and the banking world. So, awesome. Thanks everybody for listening. Hope you enjoyed.