Crypto needs a money market 

By now, the crucial importance of money markets should be obvious. And just as today’s traditional world of finance is dependent on money markets, the newly emerging asset class around crypto assets will need one too. After all, within the crypto industry, as institutions of all sorts are maturing, they are developing the same set of sophisticated market financing needs that traditional companies have had for decades.   

Consequently, the crypto lending market has grown significantly. According to a research report from Arcane, from Q3 2019 to Q4 2020, the total active collateral in the crypto lending market grew by 1170 percent³. And the most recent numbers from Q4 2021 show that one of the biggest crypto lending providers Genesis saw its loan originations reach $50 billion, an increase of 565% year-on-year comparison⁴.  

Genesis is only one of many companies that have emerged in the crypto lending space. Others are BlockFi, Unchained Capital, Ledn, Nexo, Celsius, Coinloan, or Salt Lending. There are also entities like Binance or other exchanges that act as lenders and borrowers of crypto assets. And even traditional players like Fidelity or Silvergate have ventured into crypto lending.  

Lending services play a crucial role in today’s crypto asset trading ecosystem. They are providing essential access to liquidity for various actors. Among them are firms with crypto-denominated liquidity requirements, actors that are looking for leverage, proprietary trading firms, or arbitrage funds. One of the biggest demanders of crypto lending services is market makers that make use of these crypto lending facilities as they borrow different cryptocurrencies and stablecoins for liquidity provision elsewhere. And even exchanges that do crypto lending themselves can act as borrowers if – for example – they don’t want to deplete cold storage funds to honor withdrawal requests. The same goes for miners that have Bitcoin-denominated cash flows and don’t want to sell their Bitcoin but borrow them to cover their operational costs. Last but not least, there are ever more companies that hold Bitcoin and other cryptocurrencies on their balance sheet. But instead of just keeping them idle, these companies want their Bitcoin to work for them. Hence, they lend them out for interest. This is a natural development as crypto gets bigger and bigger.

Crypto lending is highly tailored to the mechanics of money markets. Because Bitcoin is a fundamentally deflationary asset, not many businesses are interested in acquiring longer-term liabilities denominated in Bitcoin. Therefore, crypto lending has more in common with short-term securities lending and is thus a good match for money market operations. But there is just one problem today: No money market exists for crypto assets yet.