New financial markets need merchant banks and Greengage intends to prove that crypto-currencies are no exception

Greengage, which has been active in the crypto-currency markets for the last three years, has set itself a new mission: to become the merchant bank that channels the fiat currency deposits of crypto-currency exchanges to small and medium sized enterprises (SMEs). To that end, it is currently considering whether to pursue a banking licence, which would allow the firm to provide a full set of banking services across three fiat currencies. But transforming the fiat currency deposits of crypto-currency exchanges into loans to SMEs is just the first of the ways in which Greengage plans to fulfil its wider ambition of building bridges between the crypto-currency markets and the traditional financial markets. Dominic Hobson, co-founder of Future of Finance, spoke to Greengage CEO Sean Kiernan.

Questions that are being asked

1. Lending against crypto-currency collateral is now a fairly well-established market, with bank-like deposit-takers issuing loans and peer-to-peer lending taking place via DeFi protocols. What do you plan to bring to the market – you have mentioned taking fiat currency deposits from crypto-currency exchanges and making fiat currency loans to small- and medium-sized enterprises (SMEs)? How will that work?

2. Are you taking crypto-currency deposits as well or fiat currency deposits only (presumably crypto-currency exchanges hold a lot of fiat currency)?

3. Are SMEs familiar with crypto-currencies? Do they hold crypto-currency?

4. Are you aiming to recruit depositors other than crypto-currency exchanges?

5. You have been operating so far without a banking licence and as an introducing broker only. What have you achieved within those constraints?

6. Greengage is applying for a banking licence. What will a banking licence allow you to do that you cannot do now?

8. Won’t a banking licence impose capital allocations, making it hard for you to compete?

9. How distinctive in terms of services and standing will having a banking licence make you in the markets you service?

10. What sort of haircuts are we seeing on collateral posted against loans?

11. How are you holding the crypto-currency posted as collateral – do you work with a specialist or do the custody in-house?

12. Is the collateral concentrated in a narrow range of crypto-currencies – in other words, are some crypto-currencies more eligible than others?

13. Has anything akin to a margin call system developed (i. e. additional collateral when the value falls and more credit when the value of the collateral rises)?

15. Is any conventional form of credit assessment – or even KYC, AML, CFT and sanctions screening checks – taking place?

16. How do you assess the risk of crypto-exchanges as lenders to your bank – and what sort of risks (credit, reputational) do they pose?

17. What sort of loan terms (duration) are being achieved – and can you extend them?

18. What sort of loan sizes (amounts) are being achieved – and can you increase them?

19. What are borrowers using the money for – and will you broaden the range of uses?

20. What proportion of the borrowing is currently used to support trading activity (akin to the securities borrowing and lending markets being used to cover short positions or raise eligible collateral)?

21. What is the regulatory treatment of loans against crypto-currency today – are deposits protected against the collapse of the intermediary?

22. You have compared lending against crypto-currency with lending against precious metals. Do you expect to overtake that market or be complementary to it or is it just an analogy for you?

14. Are borrowers looking to raise crypto-currency or Stablecoin or fiat currency debt only?

23. Can you foresee a time when companies issue debt denominated in crypto-currency and, if so, will they be issued as loans, conventional securities or as security tokens?

24. Borrowers (in time, as issuers) are generally easier to find than investors. How would you go about attracting investors in crypto-currency debt instruments?

25. Will you (or do you expect) to issue a Stablecoin as a way of raising deposits?

26. Will central bank digital currencies (CBDCs) be good for your business?

25. You recently supported a comprehensive review of blockchain investment activities in the United Kingdom. That found the majority of the investments into the blockchain in the UK have been into Fintech (17%) and Crypto Trading (14%) and Finance companies. Does that reflect the shape of the British economy or something else?

29. The report highlighted the institutionalization of crypto-currency investing, citing Ruffer and Brevan Howard as pioneers, and putting the number of crypto-currency funds at 53. Are you seeing any of this coming through to your own business yet?

30. Something else the report implied is that regulation in the UK is falling behind jurisdictions such as Gibraltar and Liechtenstein, but also the United States, despite Brexit have created room for a more helpful approach to be adopted. We’ve had FCA guidance and advice that you must run KYC, AML, CFT and sanctions checks but not much else, but a consultation led by the Treasury is now under way on how to regulate crypto-currencies and Stablecoins. What do you think needs to be done – particularly in relation to DeFi and the regulation of DeFi?

31. The report also says some of the most prominent DeFi projects are based in the UK. Do you expect the market you help to develop to operate like the DeFi lending and staking markets, with constant switching? If so, won’t the constant switching be destabilising?

32. As you look 5, 10, 15 years ahead, where do you see the balance being struck in classic deposit-taking and lending between centralised banks and DeFi-style decentralised, self-executing, peer-to-peer protocols?