On Saturday one of the larger traditional finance (TradFi) prime brokers, Cantor Fitzgerald, announced plans to launch a Bitcoin financing business for those that want to borrow against their crypto.
“Cantor Fitzgerald arranges and finances vast amounts of securities and commodities and, as strong supporters of Bitcoin, will now build an incredible platform to support Bitcoin investors’ financing needs,” said Howard Lutnick, Chairman of Cantor Fitzgerald. “We are excited to help unlock Bitcoin’s full potential and continue bridging the gap between traditional finance and digital assets.”
The firm will start with a lending pool of $2 billion and ratchet it up in $2 billion increments. It’s amongst the first large prime brokers to get involved in the sector, particularly to offer lending against spot Bitcoin.
Cantor is best known in the crypto world as managing the Treasury assets of the largest stablecoin, Tether, which has a market capitalization of $114 billion. During the Bitcoin 2024 conference, he made a spirited defense of Tether, which has frequently attracted controversy.
As part of its reserves, Tether had a lending portfolio worth $4.7 billion as of March 2024. It also has holdings of more than $5 billion in Bitcoin.
On the one hand, the collapse of most of the crypto lenders should give one pause regarding counterparty risk and risk management. However, it left a massive gap in the market.
Not everyone approves of Bitcoin lending. Bitcoin’s key feature is that it has a finite supply. If there’s significant re-hypothecation, the supply figure grows.
On the other hand, a healthy lending market is viewed as foundational in the TradFi space. While Bitcoin may be a commodity with a $1.37 trillion market capitalisation, securities lending is a big earner in TradFi.
The need for Bitcoin lending?
“You’ve got a trillion dollar notional asset market, which is not generating a yield right now,” said David Arnold, who manages Altenburg Capital, a Swiss digital assets advisory boutique that covers lend & borrow. Until recently he was Business Development Director at Hidden Road, the crypto prime broker.
Mr Arnold sees three issues as constraining large hedge fund engagement with crypto. He contrasted the legal certainty in Switzerland with the lack of U.S. regulatory clarity. Additionally, there are concerns about whether assets are bankrupt remote and the very small pool of regulated prime brokers (PBs) in the crypto space. Given the Lehman collapse in 2008, hedge funds are no longer willing to work with single prime brokers. And crypto specialists are often relatively small.
These issues arise because most large TradFi prime brokers are U.S.-based and banks. Goldman Sachs is the most active in the sector, but is mainly involved with CME derivatives for crypto. Banks are subject to capital rules based on their risk exposures, even though technically the Basel crypto-asset rules only come into force in 2026. Crypto has the highest risk weighting of 1250% although up to 65% of the exposure can be hedged. Hedging usually requires ETFs which only became available recently.
Complicating matters, assets under custody should be bankruptcy remote, depending on the jurisdiction. However, U.S. SEC rules (SAB 121) require crypto held in custody to be on the balance sheet. That could undermine the segregation of assets in the event of a bankruptcy. Other jurisdictions don’t have the same issues.
Where will the Bitcoin come from?
Given constrained supply, if there’s to be a vibrant lending market, where will the crypto assets come from? Mr Arnold believes that some of the U.S. spot Bitcoin ETFs will eventually be allowed to re-hypothecate as much as 40% of their assets. Currently, U.S. spot ETFs have more than $60 billion in assets under management.
Another option is the large crypto foundations, most of which are Swiss-based. For example, the foundations of Ethereum, Cardano, Solana, Near and DFINITY are located in Switzerland and many of them hold a mix of assets, including significant amounts of Bitcoin.
“I don’t know of many counterparties who would turn down the opportunity to generate a yield on a dormant asset,” said Mr Arnold.
