This is a transcript of the Podcast – How Cryptocurrency Loans Work with Zac Prince – You can listen the audio here
Nye : What is going on everybody? What is going on? As always, it is your boy Nye, and welcome to the next episode of Evolvement, the podcast where we talk about bitcoin, cryptocurrency, and the future of our financial systems.
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Nye : Today, I’ve got my man, Zac Prince on the line. Zac Prince is the CEO of BlockFi. BlockFi is one of the companies that’s working very hard on and has been doing it very successfully with crypto-backed loans and lending. We’re going to sit down, we’re going to talk a little bit about what’s been going on in terms of that industry, what they’re working on, as well as why is this relevant to you? Why is it relevant to the crypto space as a whole, and more. So Zac, what’s going on my man? How are you doing?
Zac Prince : Hey man, I’m doing well. A little cold in New York, but can’t complain. Thanks for having me on.
Nye : No worries man, no worries. I’m actually, I’m headed out to Chicago in a couple of days here. And I am not excited for the cold. So it’s a good thing you’re surviving.
Zac Prince : Yeah, it’s no fun, but I can’t complain about being in New York City. I love it here. But you were just down in Miami, right? That must have been nice and warm.
Nye : Miami was nice and warm. I’m in San Diego right now. I literally just stepped inside from maybe a 70, 75 degree weather, and not a cloud in the sky. So, I got no complaints at the moment.
Zac Prince : I’m jealous.
Nye : Yeah, man. Why don’t we just start off by you telling the audience a little bit about yourself, your background, and how you got started in crypto.
Zac Prince : Yeah, sure. So I have always worked at venture-backed technology companies. I was in the advertising technology sector early on in my career. I was fortunate to be a part of two teams that were acquired by larger companies in that industry. And then more recently and more relevantly for BlockFi, I’ve worked in the fintech, and specifically the lending side of fintech sector for about half a decade before starting BlockFi.
Zac Prince : And, I worked at two different companies, one that was a data aggregator, and a marketplace for institutional capital to purchase loans from some of the largest online lenders, like LendingClub, SoFi, Prosper, OnDeck, Funding Circle. And then another company that was a consumer lender that integrated with retailers at the point of sale to offer financing for large ticket purchases. So I just had a lot of experience with lending and financial technology, and specifically like areas of debt and credit capital markets, where banks were less active than in other more traditional sectors.
Zac Prince : And then, I got really interested in bitcoin back in 2015. First time I bought bitcoin was after it had come down from $1000 to the $300 range, and I bought some basically, on a tip from a friend of mine at a party or a Meetup or something. And I forgot about it, and then a couple of months after I bought it, it was up to $700, and I thought I was the most badass trader that had ever existed. And I sold it all. And then a little while later, it was even higher, and I bought back in. And at that point, this was early 2016, I really kind of fell down the proverbial rabbit hole, couldn’t stop reading about it, couldn’t stop talking about it. At a certain point, my wife said, “You’re talking about this way too much. And you’re talking about it to me, and I’m really not that interested in hearing you talk about it all the time, so you should go find some other people to talk to this about.”
Zac Prince : As I started attending Meetups, in and around New York, I had noticed transition and a maturation of the people in the room. So it went from being some of the earliest adopters and technologists and Libertarians, to a more, call it Wall Street/Venture Capital type crowd. And then, early 2017, I got really excited about Ethereum and the Enterprise Ethereum Alliance. And I just had a feeling that this was a sector that I had to get involved in. And given the work I had been doing in alternative lending, debt, and credit, was kind of the most logical area to try to build something in the crypto space.
Zac Prince : And so mid-2017, I just decided to do it. And we started BlockFi.
Nye : Awesome. What inspired you to start BlockFi? Obviously, it has to do with your background. Obviously, it has to do with your expertise, but in terms of the need that you saw in the crypto space, was there a specific need that you saw, where you just said, “Wow, this is missing.” Or, did you see maybe a competitor where you said, “Hey, I can do it better than these people are doing it.” Or, what was it that was like, it’s time to start BlockFi? It’s time to start this kind of adventure.
Zac Prince : Yeah, I mean, it was all of those things. So, I climbed through the ranks at high-growth venture-backed companies, and always expected that at some point I would start a company myself. So, I felt like I was ready from just a pure professional development perspective. Being able to borrow against an asset and having debt and credit markets supporting assets of all different types, is a critical piece of financial services, infrastructure, that didn’t exist at the time. And back then, there were maybe a couple of companies who had their splash pages up and they were going to do an ICO to start a lending business. As much as I was attracted a little bit to the ICO market at the time, purely from an investment perspective, I thought that I made absolutely no sense whatsoever.
Zac Prince : So, to do an ICO for a lending company, and so, I definitely thought that I could build something that was going to be better than the alternatives that were starting to emerge at the time. And, you know, started talking to some people in my network, specifically my co-founder Flori Marquez, who previously worked at Oak Hill Advisors, which is a $30 billion debt and credit asset manager, And then more recently, before co-founding BlockFi with me, she was at Bond Street, which was a lending business. It was acquired by Goldman Sachs, and she loved the idea and said, “Let’s do this together.” And so, we just started working.
Nye : That’s awesome. That’s sweet. And, let’s say I’m … I mean, I’m very, very new to the loan aspect of things. I mean, I’ve been in debt, I’ve gotten myself out of debt, so I understand the debt side of things, but in terms of loans and lending, how does that all work? Let’s say for example, I wanted to go get a crypto-backed loan, how does it work? How would I do that? And what is required of me?
Zac Prince : Yeah, and I think even before talking about the steps, it’s important to frame the conversation around debt a little bit. So, as a general rule, I think of there being two different types of debt, from a personal finance perspective. There’s good debt, and there’s bad debt. And, quite simply, bad debt costs a lot, and you’re taking out the debt for an unproductive use case. So, for example, you’re putting thousands of dollars on a credit card to buy new shoes and drinks at the bar. And the rate on that debt is 25% or something really high. An example of good debt would be, a mortgage, potentially even a mortgage for an investment property where you’re taking on debt at a low cost to buy a productive asset.
Zac Prince : So bad debt can be very, very challenging to get out of. It’s not something that’s generally recommended from a personal financial advice perspective. And good debt is frequently a tool for building wealth. Is one of the most commonly used tools for building wealth, even people who are on the conservative end of the investing spectrum, like a Warren Buffet. Very, very frequently used debt opportunistically, to finance the purchase of certain assets.
Zac Prince : Talking specifically about crypto-backed loans and how it works, basically, the concept is a little bit similar to a mortgage. So with a mortgage, you have an asset of a house, and you’re borrowing against the value of that house. For a crypto-backed loan, you have value in your crypto, and you can borrow against that value, receive USD at a low cost, which you can then use for any purpose, but we most frequently see it used for productive purposes. And by doing that, you accomplish a couple of objectives as it relates to the assets that you already own, which are the crypto assets.
Zac Prince : The first is that you still own them. So, if prices go up in the future, all of that value accrues to you. The second is that by borrowing against an asset, you are not triggering a taxable event. So, if you have a capital gain in bitcoin or other crypto assets, you bought it at a lower price than what it’s worth now, if you sell it, you have to pay taxes. But by taking out a loan, you’re able to get cash, without triggering that taxable event. And additionally, if you use the proceeds from the loan to invest in something, then generally the interest charged to you on that loan will be deductible against other capital gains that you have in the same year that you incurred the interest expense.
Zac Prince : And currently at BlockFi, we are lending at rates as low as 4.5%. So another use case we see outside of investing is, just paying down higher cost debt. So if you own bitcoin, or ether, but you also have debt on a credit card that has a 20% interest rate, it could make sense to take a loan secured by your cryptocurrency at a lower cost, pay off that credit card debt, keep your crypto, and hang on to the lower cost debt, from a lender like BlockFi.
Nye : Interesting. So you’re saying, let’s say I bought bitcoin right now, at around $3500, and I sat on it, and then I realized you know, I need a loan out of this. And I put it into BlockFi’s system and got $3500 worth of, or whatever the crypto’s worth, back to me. And let’s say that it skyrockets next week to $6000, are you saying that’s not a taxable event, like while it’s still in the system?
Zac Prince : Correct. So forget the loan. If you buy bitcoin, and you hold on to it, you don’t get taxed on it until you sell it. And, to go back to that exact example, if you have one bitcoin right now, we would lend up to 50% of the value, secured by that one bitcoin, so you can borrow up to $1750. But if your bitcoin appreciated and bitcoin is now $6000, or $7000, that’s still your $6000 or $7000 worth of value. It’s still your bitcoin.
Zac Prince : You just pay back the loan that you have with BlockFi, which you can do using dollars, and then we send the bitcoin back to you. Or you can pay back the loan using some of that value from the bitcoin. But if you pay it back in the bitcoin, or if you sell the bitcoin in the future, then, you’ve created a taxable event.
Nye : So, all that’s really, really interesting. Getting into the relevancy of all this, why is crypto relevant to let’s just say the whole crypto space as a whole, the broadness of what everything that’s going on. Like, what role does crypto lending play within the whole ecosystem?
Zac Prince : Yeah, sure. So, one of the things that lending does for the crypto ecosystem is that it gives a lot more utility value to the assets in crypto. So for example, being able to borrow at a low cost against an asset like bitcoin, is a very, very valuable utility for bitcoin to have. There aren’t really any other assets that I know of, that a retail investor, for example in Argentina, can purchase, that they can then go and get low-cost debt financing on from New York. And so, that simple ability adds a lot of utility value to bitcoin and other crypto assets.
Zac Prince : The second is that, and this doesn’t exist very much today, but it will exist very soon, for BlockFi, we’re actually launching at the end of February, but soon you will see bitcoin and other crypto assets start to produce a yield for owners that hold them with companies that offer this option. So, holding bitcoin with BlockFi for example, will generate a 6% annual yield to the owner of the asset. And, if there were two assets where all things were equal, but one generated a yield and the other did not, the asset that generated a yield would be valued much higher in the market. So that’s another incremental utility that having developed lending markets will add to cryptocurrency.
Zac Prince : And then last, that it has an overall liquidity benefit from a financial infrastructure perspective. There are market participants who need to be able to borrow. Or need to be able to get leverage. And them having access to those functionalities, and those products and services, makes the market more robust, makes the market more active, and makes the market more liquid. So it’s just a core piece of financial services infrastructure that exists almost everywhere else, and should also exist in crypto.
Nye : Interesting, very interesting. I mean, one of the main things, like I don’t understand is, what’s the difference between a crypto loan and a traditional loan? Why wouldn’t I just go to someone who would give me a loan for another asset, then instead of just the crypto side of things? Is it easier for me to get a crypto loan? Do you measure credit status, and credit scores, and things like that? Yeah, why would I choose using BlockFi over traditional formats?
Zac Prince : I think there’s a few reasons. So one, a loan from BlockFi does not count on your credit score. We don’t do a credit pull as part of our underwriting or report the data to credit bureaus. So, for example, we have quite a few customers who are close to applying for a mortgage. And, when you’re getting ready to apply for a mortgage, the ideal thing is to have 60 or 90 days, or maybe even more, where you don’t have any hard pulls on your credit report. So, this is a loan that does not affect your credit report.
Zac Prince : The second is that you, depending on your credit score, might not have access to options that are as low cost as loans from companies like BlockFi, where the rate starts at 4.5% a year.
Zac Prince : And the third is that, you might not have access to other options where you could get as much credit as you could from a crypto lender. For example, if you own a large amount of crypto assets, there might be no other lender that would be willing to extend as much credit to you, as someone who will actually prescribe value and use those crypto assets that you own, as collateral or as security to receive a loan against them.
Nye : Okay, cool. And, I’m really curious how you get the value of this? So, you said that you take 50% of the current market value in terms of a loan? That’s the amount you give? Like, how do you calculate that and how do you hedge in such a volatile market, you know? I mean, maybe not right now, it’s extremely volatile, but if you were giving out these loans at the end of December, or something like that, it could range 50% in one day. How do you hedge, and how do you calculate those risks?
Zac Prince : Yeah, that’s a great question. So we lend up to a 50% initial loan-to-value, meaning, you can borrow up to 50% of the current value of the crypto assets that you’ll be using as security for the loan. The way we determine that price, is based on the current market price. So for bitcoin, we use an index. For other assets that we lend against, we use a price from a single exchange, for example, that has a USD pair.
Zac Prince : And in the event of downside market volatility, there are levels in the loan agreement that are defined where, first we would have a margin call, so if bitcoin fell by a certain amount, and the loan-to-value ratio goes from 50 to 70%, meaning the price of the collateral has gone down, we would have a margin call. And what happens in a margin call is, our clients get a notification that the value of their asset has fallen, and they have a period of time to add additional assets as security, to pay down the loan principal, or take no action. And then, if they decide to take no action, and another period of time goes by, and the price has not recovered, actually only if the price has fallen even further, at a certain point, we would sell a portion of the crypto that they have posted as collateral, to pay down their loan balance, and manage risk from BlockFi’s perspective.
Nye : I’ve noticed that you guys are integrating into major exchanges like Gemini, and things like that. What does that even look like? How is this going to be a benefit? What does it look like? I’m curious like, see how that would even work?
Zac Prince : Yeah, so right now, Gemini is our primary partner for asset custody. So, we leverage their security infrastructure, their cold storage, their insurance on crypto assets that are stored with them, as the location for where we safeguard assets that are pledged as collateral for a loan from BlockFi. Additionally, we’ve integrated GUSD, their tokenized dollar as a loan funding option, and a loan repayment option. We’re very bullish on GUSD and other tokenized fiat currency offerings, because we think that will also be a big benefit to the ecosystem.
Zac Prince : And down the road, we think there will be ways where we can make loans from BlockFi available to customers, in an integrated fashion, on wallets and exchanges. So, if you are already using Gemini, and you have some bitcoin there, imagine seeing a button that says, you can borrow dollars secured by your bitcoin at 4.5%, and in two clicks, have the money wired to your bank account. That type of integration doesn’t exist today. But, we’ll probably start to see the first ones go live in the back half of this year.
Nye : Very cool. Very cool. So, I’m going to throw a scenario at you here. Let’s say I have invested, or let’s say I started a loan. I sent you two Ethereum, when Ethereum was $1000, meaning, I put in $2000, got a loan probably of around $1000. What does payback look like? Obviously, with a traditional loan shark, or a traditional loan, it would look like, higher and higher interest rates, people coming and knocking at your door if you’re not paying it. With services like lock fee, crypto lending in general, what does it look like in terms of getting your money back, if I don’t pay you back?
Zac Prince : Yeah, great question. So, the ways our loans are structured, we require interest-only payments throughout the duration of the loan. And, you always have the ability to refinance the loan at the end of your initial term. And to-date, all of the loans that we’ve made, have been a one-year term with no prepayment penalties. So you can also prepay the loan at any time, and all you have to pay is interest up until the date that you prepay.
Zac Prince : So we just do a quick little bit of math, you borrowed a $1000. Let’s say it was at 4.5% interest rate, that would be $45, total interest for the year. So your monthly payments to borrow $1000 would be $3.75.
Nye : Okay, interesting. Very interesting. And that just keeps getting taken out of the actual Ethereum? Say, if I didn’t pay, it would just keep coming out of the initial loan that I gave you guys, is that correct?
Zac Prince : Yeah, I mean, I don’t think we’ve … Well, I know we haven’t had any clients use the collateral that they’ve posted, to just make their automatic payments. We have the ability similar to credit cards or other types of payments, to set up auto-pay. So you could set it up so that the $3.75 was just withdrawn from your bank account automatically every month. But if you weren’t paying the $3.75, or responding to us, then yes, we would just sell a fraction of Ethereum every month to pay the $3.75 monthly payment.
Nye : Very cool. Very cool. What do you think the future of all this looks like, man? I mean, obviously, you’re heavily invested in it, in terms of not just crypto, but I’m speaking more about the crypto loans industry side of things. Obviously, you’re very invested as a founder, as a creator of BlockFi, but what do you see as the future? Do you see there’s going to be a lot of competition in this sector? Are only two or three major players going to rise out of the top? Or is there just going to be one? What do you think?
Zac Prince : Yeah, I think there’ll be multiple successful companies. I think you’ll see a diversification of product offerings. So right now, it’s primarily loans, but I think you’ll see things like, lines of credit, credit cards, the ability to earn interest on your crypto, all different types of flavors of lending, in ways that add value to cryptocurrency owners, and the broader ecosystem. I think you’ll see larger companies, whether that’s crypto industry specific companies like Coinbase, or Bittrex, integrate or buy or build lending functionality themselves.
Zac Prince : You’ll also see companies like Square and Robinhood, start to offer margin loans, or margin trading over time. And eventually, if we look really far down the road, I think you’ll see adoption from banks, at least in some markets where, in the same way that you can get a mortgage from a bank today, based on your home value. You’ll be able to get a bitcoin-backed loan from a bank, but that’s probably at least five years out. But I don’t think it’s winner take all. I mean, look no further than the exchange market. Crypto’s global, it’s fragmented by geography. There are lots of users and a growing user base. And so, I don’t think you see just one company that does this. I think you’ll see a number of companies that do it, and I think you’ll see bigger companies integrate those offerings or build them themselves over time.
Nye : Interesting. Interesting. And, I mean, there’s not a lot, but there are a few competitors that you guys have. What makes, not just you different from competitors, but what separates competition in this kind of industry? Is it interest rates? Is it the amount of tokens, or the diversity of tokens that you offer for loans and lending? What is the differentiating factor there?
Zac Prince : I don’t think there’s necessarily a silver bullet in terms of differentiation. If there was one, it would be rate. At the end of the day, lending is a commoditized product, and rate is really, really important. I think other things that are important are trustworthiness, so if you think about sending someone $2000 of Ether, and then them giving you $1000 loan, that’s a transaction that requires some trust. And so, looking at the backers of a company, looking at the team at a company, looking at the compliance and regulatory practices of a company, are all really, really important when considering where to use one of these products.
Zac Prince : You also, because of the ICO boom, see a lot of companies in the lending sector that have a utility token in some way, shape or form. So for example, you can use a utility token to get a discount on your interest rate. Or, when you’re earning interest in crypto, it’s going to get paid in the utility token from the company. And, we just don’t think that stuff really makes any sense, and have differentiated ourselves from quite a few others by just offering a really positive user experience, great customer service, and the best rates available in the market for the products that we have.
Nye : I love it, man. I love it. This is something that I knew nothing about, you know. Like I said before, I’ve found myself in debt, I got myself out of debt, so when I look at loans, and I look at lending, I’m like, is this something I really want to get into? But it seems like it’s actually a really comfortable process. It seems like it’s something that isn’t super challenging and is easy to work with. So I appreciate you coming on man.
Zac Prince : Yeah, and even if the loans don’t necessarily make sense in terms of you being a borrower, being a lender can be really attractive. So if you have bitcoin that you just storing, and you’d be interested in earning a 6% interest rate, paid in bitcoin monthly, that’s something that we’re going to be offering, I think around the time that this podcast goes live. So that’s another angle of the lending market to keep in mind.
Nye : Interesting, interesting. How does that work?
Zac Prince : Basically, it functions almost exactly the same as a savings account at a bank. So, when you have a savings account at a bank, you put dollars into it, and then every month, there are more dollars in your account. And the dollars that are paid each month, create your new account balance. And then you earn interest on that new account balance.
Zac Prince : So, it’s going to work exactly like that. You deposit bitcoin, or ether initially, will be the two assets that we will support. And every month, you’ll earn 6% annual interest, paid to your BlockFi account. And the interest compounds over time. And basically what you’re doing is, you are acting as a lender into the institutional market of borrowing crypto, and BlockFi is helping to facilitate that by aggregating deposits from retail customers and then having the infrastructure and the scale to conduct those transactions with institutional borrowers. And then obviously sharing the economics of that with our clients who are holding the bitcoin and ether in BlockFi accounts.
Nye : That’s sweet. So if I put in one bitcoin, I get 6% of that yearly, or monthly?
Zac Prince : Yearly. If anyone is paying you 6% a month on bitcoin, it’s probably a scam, so you have to be careful. But 6% yearly. So, if you deposited one bitcoin on January 1st, then the following January 1st, you would have 1.062 bitcoin in your account. And the reason it’s 1.062 instead of 1.06, is that the interest in these accounts compounds. So once interest is paid to you, it adds to your balance, and then you earn interest on your entire balance every month.
Nye : Very cool. Very cool. Okay, cool, that definitely makes sense. That’s super, super interesting. Again man, Zac, thank you so much for coming on. I really appreciate my man.
Nye : If there’s anything that people need to learn or know about BlockFi, where can they learn about that?
Zac Prince : Yeah, you can check out our website, BlockFi.com. Feel free to reach out to our support chat, or our general email support at BlockFi.com. You can follow us on Twitter, @therealblockfi. And we’re generally pretty easy to get a hold of. So don’t be shy.
Nye : Awesome man, thank you so much for coming on. Thank you for educating us about crypto-backed loans. This is something I didn’t know about. It’s something that I’ve been following along for a while. So, I feel much more educated on the subject. I appreciate it.
Nye : And for everybody listening, this is another episode of the Evolvement podcast, with your boy Nye, where we talk about bitcoin, cryptocurrency, and future of our financial systems. Thank you so much for joining, and we’ll catch you next time. Peace.
Nye : This has been the Evolvement podcast, with your boy Nye. Thanks for tuning in. Head over to Evolvement.io for updates and join us next week for an all new episode. Peace.