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January 12, 2018  

Startup Aims to Securitize Crypto Loans

A Denver firm that recently began originating loans secured by cryptocurrencies is sketching out plans to securitize the credits.

SALT Lending uses a couple channels to fund investors wishing to borrow against their holdings of digital currencies. On Dec. 27, the firm launched its Crypto Credit Opportunity Fund, which booked $7 million of loans in its first nine days and expects to originate about $50 million more in the next few weeks.

Based on its current origination rate, SALT aims to issue some $200 million of bonds backed by cryptocurrency loans in the fourth quarter.

SALT executives have been talking to rating agencies about the planned offering, but it’s yet to be determined whether the issue will actually be rated. And there’s no word on which underwriter SALT will employ.

The firm is hoping for strong loan demand from investors in digital currencies who have seen the values of their portfolios skyrocket in recent months, but are loathe to sell their holdings for fear of missing out on additional gains. The lender is targeting, among others, investors who wish to put off sales of their appreciated holdings to avoid paying taxes on their short-term gains.

SALT also operates a marketplace-lending channel that matches borrowers with institutional buyers, including its Crypto Credit fund.

In marketing the fund, SALT is highlighting the opportunity for investors to gain exposure to a rapidly emerging asset class without the operational headaches of owning digital currencies directly. The marketing pitch also emphasizes the potential to reap high-yield returns on secured debt at a time when interest rates are near historic lows, according to sister publication Hedge Fund Alert.

SALT’s borrowers pay interest rates of 10-20%, depending on the amount of leverage involved. The fund writes loans representing no more than 60% of a borrower’s cryptocurrency collateral, but says it will soon offer accounts with loan-to-value ratios as high as 80%. For now, SALT is writing loans with terms of up to three years secured by bitcoin and ether, but it soon plans to begin accepting other types of digital currencies as collateral.

In promoting its eventual bond offering, SALT will face the difficult task of winning over investors who are put off by lending against one of history’s most volatile assets.

Mark Adelson, an independent consultant and former chief credit officer for S&P, said the uncertainty surrounding the future of cryptocurrencies would make them an unlikely target for securitization. “Assessing the stability of the value of something so new is inherently speculative,” he said. “It could easily be the case that cryptocurrency replaces the currencies of the world, but we don’t know how long that will take or even whether it will, instead, completely crash.”

SALT says it possesses technology that will allow it to endure the high volatility of cryptocurrency values — maintaining over-collateralization even during massive single-day valuation losses. During such an event, the firm would rapidly and repeatedly sell portions of each credit’s underlying currency, forcing some loans to be paid in full.

Still, Adelson added that he would expect such a bond offering to carry a low credit rating and high subordination level.

SALT’s crypto-lending fund is run by a newly formed unit called Salt Blockchain Asset Management under chief investment officer Gregg Bell, who also heads operations for SALT Lending. Before joining the firm last year, he invested in structured products at ArrowMark Partners, then known as Arrowpoint Partners. He joined that firm in 2015 after five years focused on structured products at RBS.

SALT was founded by chief executive Shawn Owen, business development chief Blake Cohen, creative chief Caleb Slade and strategy head Ben Yablon. The firm employs about 45 staffers.

Beyond its fund, which has attracted an unknown amount of capital, SALT has built a roughly $200 million balance sheet. Most of that sum was generated through the massive appreciation of the firm’s cryptocurrency assets, beginning when it formed last year. The firm raised $45 million in mid-2017 via token sales, and attracted $3.5 million of startup capital via a mix of debt and equity.

To take out a loan, borrowers first are required to purchase a nominal amount of SALT’s tokens. So far, the lender has sold “memberships” to about 50,000 potential borrowers.

SALT, an acronym for Secure Automated Lending Technology, started by writing loans via its marketplace-lending business — similar to the model pioneered by LendingClub. Because LendingClub and its peers offer unsecured loans, their buyers primarily are concerned with the creditworthiness of the borrowers. That’s not the case with SALT.

Because it writes only secured loans, the lender doesn’t bother with credit checks. Instead, it employs a collateral-management system that continually monitors the values of the underlying assets and triggers margin calls when the currencies fall. Borrowers receiving margin calls have the option to put up additional collateral or pay down their balances.