Unlocking Crypto-Backed Loans: Benefits, LVR Risks & Tokenised Collateral with Chris Giovine

0:00We're going to dive into particularly crypto back loans. So by the end of this, you're going to find out what's all the rage about crypto back loans. You know, we're seeing a lot of chatter about it with a lot of providers starting to offer the service and the feature to its customer base. So you know, we'll dive into like what sort of structures exist, what's the benefits, what's the risks. So by the end of it, you'll walk away knowing a lot more than when you started. Hey guys, welcome to this week's edition of the Tapping Into crypto podcast. And it's a little bit of a special app. We haven't done this in quite a while where we get someone in who's actually an expert and not just us usual hacks trying to talk about what's happening in the markets. Like there'll be a little bit of that. But this particular week, I think with the whole talk of the clarity act and the whole industry sort of having its coming of age moment, it's a pretty good opportunity to start talking about well, what actually makes the crypto market so different to the traditional market. And we're going to dive into particularly crypto back loans. So by the end of this, you're going to find out what's all the rage about crypto back loans. You know, we're seeing a lot of chatter about it

1:01with a lot of providers starting to offer the service and the feature to its customer base. So you know, we'll dive into like what sort of structures exist, what's the benefits, what's the risks. So by the end of it, you'll walk away knowing a lot more than hopefully than when you started. If we've done our job right, right? And to walk us through it, we have Kristia Vien, Senior Product Manager here at SwiftX who has been working tirelessly on crypto back loans. For us here at SwiftX and I thought who better than I can just rope him into this podcast and get everyone to sort of distill and hear what he has to say about the product. So obviously, Chris, you're welcome to the show. I think it's your first episode that we've dragged you in for one. Would that be right? Thank you, mate. Yeah, yeah. I don't know, I've kind of been wanting to get on for a while. So being what patiently waiting my turn for the last two years, but there I am, it's something worth talking about. So looking forward to it. No, it's good to hear. And we're going to dive into loans and everything in a minute, but a little bit about your journey. Have you been in crypto for quite some time now? Or has this just been, I think it's been a long time, right?

2:02From, it feels like a long time. Yeah. I think everyone feels that way. Yeah. I think getting into it, I wasn't as early as many others. I think I got into it like a lot of other people did in 2020. There wasn't a lot to do during COVID and everyone was spending a lot of time at home. So I think the markets were pumping them. Crypto was pumping, you know, the stocks were pumping as well. So I've been in crypto heavily since 2020 and then I've been at SwiftX for the past two years as well. So I don't know, I kind of dislike the term, but living and breathing it is probably a good way to put it. It is tiring. It's the only thing, right? You kind of have to live and breathe it because it just moves so much like it's, it kind of gets exhausting. Yeah. Yeah, absolutely. And a good way. Yeah. I don't know. I was talking to someone earlier today and I was like, I kind of liked the bear market. Yeah. All right. We need to talk about that. Yeah. But what do you think about the market? So obviously we're recording this now heading into the back in a September

3:03thing to start looking a bit better or? Yeah, absolutely. I think we got that close above the 50 week SMA, which is the big one everyone's been looking for. Yeah. Yeah. I think there was some big influencers out there that were hoping it closed under and we'd get more time in the bear market. Yeah. So perhaps a low, low, but I think yeah, coming in with a, with a high low now, I think yeah, we're full steam ahead. But let's see, I mean, there's lots going on in the world today and we might get back, back down, you know? So there might be some opportunities ahead, I think. Yeah. But pretty, pretty strong sign of conviction. I think we're all on the same page there. And it's, again, it just sort of puts crypto back in the spotlight. I mean, I don't think I've ever seen, particularly if we think about the move we've seen recently, crypto so quickly be an optimistic point. It even just like public media publications. I'm already seeing news articles where everyone's saying investors are flocking to crypto. I'm like, I don't know if they are. But it's interesting to see the positive sentiment shift. And I think maybe that's got a lot to do with, you know, the whole clarity act like it didn't go through. You know, we're recording this again in September where it just recently was

4:04knocked back by 11 votes from getting on the ballot. I think it's kind of the market just realizing, hey, look, regulations probably coming. We saw the SEC come out with the innovation exemption for tokenized stocks. So, you know, I think again, like we're going to talk about crypto back loans here today, like it's all about, I think everyone's probably going to certainly start to understand why the asset class, why the technology brings something a little bit different to the table. And yeah, do you feel like that's a big driver right now, the catalyst wise? Or? Yeah, yeah, absolutely. I think, I don't know, I think there's still a lot of people that are in the four-year cycle camp. Yeah. Understandably, like it's been four years until it's not right. And this is the first time that hasn't done it. Yeah, yeah. I mean, the history tells us that the bottom comes 12 months after the top. And we're kind of about there now. You know, maybe it's come a bit early, but two months early, I think. Yeah, yeah. Two months early, I think October 25 was kind of when we were looking for the bottom there. But, yeah, I think with everyone expecting the bottom, I mean, October 25 is still ahead

5:04of us, right? Who knows? But, yeah, it's, I think, yeah, we're an upward trajectory at the moment. Yeah. I think, yeah, with the US leading on legislation as well, it's interesting. To watch how quickly they are moving over there and the supportive legislation that they're trying to put forward now, I think, is really going to put them in a good place. And hopefully, in Australia, we can, we can take something from them as well. Yeah, I think with anything like, guys to be in health before I was in crypto. And I knew even from like a health policy perspective, we were very fast followers as a country. So, yeah, I wouldn't be surprised if we sort of take that approach even with this as well, which, which is why it is like, yeah, again, I think like a really good time to just step back and start to understand, you know, what is it that's going to come to the table that consumers really didn't have access to before? And, you know, if we did have to sort of set up the whole concept of crypto back lending, I mean, it is essentially just loans based off of crypto. But, you know, how do you think people should think about this product when they're trying to understand it from a lens of, you know, everyone's familiar with lending against a

6:06house, personal loans, sort of where does that sit? Do you think within that sort of range of offerings that are currently out there? Yeah, I think it's another offering to have available to anybody. You know, if you've got a, if you've got a car loan or you've got a mortgage, they're essentially like secured lending products. And this is not this similar to that as well, you know, you put your Bitcoin up as, or your crypto up as security. And then you can lend off the back of the value of that Bitcoin or that crypto as well. Just like you do with a car, right? You purchase a car and a car loan, the car's really in the bank's name as security. And you've got to repay that loan over time. So would that be the same case here? Like you put your Bitcoin or eth like you said as a secure collateral? Like that's the ownership of whoever's issuing you the loan and yeah. Yeah, you maintain, in most cases, you would maintain ownership of that asset. Okay. And they are, the organization or the crypto exchange that's holding that security would

7:09then hold that over time just from a risk perspective and then you would lend against it. So for example, you know, you could put up $100,000 worth of Bitcoin at the time of applying for a loan. And then you might be able to take out, you know, 40% of the value of that Bitcoin, so $40,000 loan. And then over time, the Bitcoin price would increase and decrease. And we can get into this in a minute, but the LVR of that, you know, that 40% would increase over time if the price of Bitcoin dropped as well. And you might have to manage the loan, but it works the other way too. If Bitcoin increases, like we're seeing now, that LVR reduces and that risk reduces as well. And then, you know, that products out there where you can redraw off of that value as well and bring that LVR back up to 40% too. So you could borrow the difference between the two. When people are taking a loan against Bitcoin, is it Bitcoin they're receiving back? No, no, no. In most cases, you're putting up your Bitcoin and you're either receiving fear straight into a bank account.

8:09That's probably the, yeah, that's probably the nicer method. The other one is you could receive stable coins directly into your account, the exchange account that you're borrowing from as well. So like USDC mostly. Yeah, okay. So, I guess like the difference there is like if we think about, all right, well, what's difference between a house loan and like a personal loan and a car loan, would you say like a pretty key takeaway there is that the underlying asset, which is Bitcoin or Ethereum or whatever crypto assets being collateralized, that value can change, which then changes, I guess, the nature of your loan, which makes it a little bit more different to your traditional loans. Yeah, yeah, absolutely. I mean, you know, you're not watching, well, most people maybe they aren't now with the state of the market. It's in Australia when it comes to residential real estate. But most people are looking at the value of their house, you know, 24 hours a day. And you don't really see that the value of your home that you've got up for collateral moving in real time. Yeah. Yeah, you know, use crypto as security. It does move in real time. So there is this feeling where that it is more risky because you know, there is this,

9:09we call it the L word at SwiftX liquidation. We don't like to talk about it that much and we don't use that word here. But yeah, you do have to manage the loan more. But yeah, you know, the products that are out there today do help you along that journey as well. They generally give you a fair bit of warning if you need to take action and that action might be repaying some of the loan to reduce that LVR back down to a less risky kind of level or it might actually be adding more collateral to reduce that LVR. So more Bitcoin, for example, to reduce that LVR down. So really simply if someone did have a loan, let's say this would get a Bitcoin loan last week, we've seen prices now move 10% higher. The key takeaway there is that essentially that LVR as you call it. Could you explain LVR for people? Just. Yeah, as well. So at the highest level is just the measure of risk and it's the difference in basically the security that you put up and the amount that you're borrowing. So if you put up $100,000 worth of Bitcoin and you borrow $40,000 Australian dollars, then

10:12that LVR would be 40%. Yep. The lower the better. So if Bitcoin was to increase by 10% then the LVR would decrease by 10% to 30% and they would become less risky. And you know, at each LVR level there might be an action that you need to take. So for example, some products might require you to take action at 60%. Okay. And give you a feeling. So that would be a situation where Bitcoin's price fell from where you borrowed? Yeah, that's right. Yep. And it's pushed that LVR up and you just might need to take some action to reduce it down. Okay. So that would be depositing or paying back some of the loan, right? Yeah. Yeah, that's right. And then like on-chain as well, there are a number of different on-chain products out there. And you know, there is this risk of instant liquidation on-chain as well because the LVRs that they allow are a lot higher. So you might be able to put up 100K worth of Bitcoin and then take out a loan for 90K, right? And you could have a 90K LVR, but as soon as that hits 100%, they sell off your Bitcoin

11:13and that Bitcoin's now theirs. Right. So you repay the loan. Don't really get a chance to... Is that like a clear distinction between... I guess you could put Bitcoin lending as like two venues and you can go to. Like obviously we're going to talk about SwiftX today and like what we offer. That's more of like, I guess would you call that like a centralized offering? Yeah. Yeah, I'd call it a centralized offering. Yeah. And maybe you know, on-chain is different, right? There's no one you can call. There's no one you can talk to. There's no one you can ask questions about these products. Yeah. There's no one that will call you to say how you need to take action here and you need to take action by this date. Yep. Where yeah, more centralized products will have, I guess people that will give you a call and walk you through your steps and help you out. Do you see that sort of changing at all in the future? Like do you feel like people just always have two of those two options and it's just what people want to pick or do you feel like regulation might change that or it's hard to say? Yeah, I think it's hard to say at the moment. I think you've got people in both camps, you know? I think, you know, with Coinbase's product for example, you know, they've got over a billion dollars in security held and loans dispersed as well

12:17at the moment, which is a significant number. But then you've got people that would rather not use the centralized platform as well and just go on-chain and perhaps take more of that risk on-chain. Yeah, okay. Yeah, so I guess adding to that, you know, most centralized products will have lower LVRs because, you know, they want to help you manage the risk where if you want to go on-chain and borrow, you know, potentially up to 90% LVR, then you can go do that as well. And I think both choices are good to have. Yeah, and it'd be good to, like, get your take too. Like when you think about products like this coming to sort of market, I feel like it all started pretty much when you said that you came to the industry as well back in 2020. We saw the whole Ethereum and Smart Contract space, the D5V1, if you want to call it blow-up. I mean, are they compound with some pretty big names back then? Yeah. Like, you know, we're just standing to this day, like having stood the test of time. Like, do you feel like the reason that which people use loans now, versus a past, like from what you're seeing and hearing and researching over, you know, getting this product

13:19while for us here at Swiftact, so do you feel like when you think about what people are doing with these loans, is it changing and evolving? Or, like... Yeah, I think it is and I think it will evolve with legislation, you know, different centralized products will only allow you to lend for different loan purposes as well. I guess there are different products that can be used for different loan purposes. So, for example, for a lot of centralized lending products, you can't reinvest the funds that you're borrowing because it's not like an investment loan or a margin loan. You need certain licenses for that. So you might be able to just borrow to put an extension on your house or purchase a new car and not be allowed to reinvest that borrowed amount back into crypto. So it's just I'm locking, I guess, this is the value of what you've been holding with that traditionally selling it in market, right? If you've got that longer term view potentially. Yeah, yeah, yeah, correct. The whole idea here is to hold the value of your asset that you're putting up for security.

14:21Same as your house, right? If you borrow against your house, you're not necessarily selling it out. Yeah, yeah, yeah, yeah. Speaking broadly, yeah, that's correct. Yeah, just back to you, back to DeFi, I guess, when you were speaking, it was very interesting, I guess, four or one of the six years ago, five or six years ago. It's crazy when you think about it, right? I did the max. I was like, damn, I'm getting up. Yeah, there's like pre-COVID and post-COVID and I feel like it's very blurry in between. But yeah, if we look back then, you know, interest rates were so low. It was hard to get a yield in a traditional bank account, you know? So we saw all these, you know, kind of degenerate products pop up on chain. And then we saw some really legitimate ones as well that are still around today that could give you a better return. That is a good way to look at it, right? Like, at least we've had enough time of, yeah, this was maybe a prototyping phase or like an experimental phase of on-chain coming, like lending me a thing. Like you said, it's been through thick and thin, like two bear markets now. Yeah, and it's still standing up today.

15:22So I think there is a place for it. And I think a lot of the other, the big players in the US as well, the other crypto exchanges are moving towards on-chain and just trying to really bring on-chain into a more centralized exchange and kind of more centralized experience for users as well. Not everyone's comfortable going on-chain. And as you said earlier, like it moves so quickly that you just have to be in it all day and not everyone wants to do that. So you see more centralized platforms now creating frontends or the more the user experience with more of an off-chain back end. Yeah, which makes sense. It's like, can't expect everyone to want to get in deep and dirty with like, transacting between different networks and chains. Where I think we've always spoken about it just across our business even. It's like, what does the future of crypto look like? Well, it probably looks like a world where you don't even know you're using. Like the blockchain technology rails. The same way you go tap your credit card at the shopping center and you're not necessarily thinking about what security system am I using to place this all at all, right?

16:25Like it's, you kind of, I guess, people start to trust the technology, right? Yeah, I think we see that in Bitcoin's price over time, specifically anyway. You know, you've got less drawdowns over time. You know, a lot of people are expecting 70% drawdown this cycle. There's still time for that, right? There's not a sure thing, but we only saw like a 50% drawdown. And I think that volatility is reducing over time as well. And people are becoming more confident with crypto in general. Yeah. And one question I have that I don't know if you have an answer for. But like, it feels like the natural progression of everything is that we're going to move away from. Well, I guess blockchain technologies enabled a lot of things. But one of the big use cases recently has been the tokenization of assets outside of just the crypto industry. So do you feel like it's not unreasonable to think there's a future where you could probably be lending it to Nvidia shares or your S&P index because it's all tokenized. It's all collateralized. Yeah, yeah, absolutely. I definitely think it's going to go that way. We're seeing it, you know, we're seeing it on FOMO at the moment as well. You see all these asset pairs being put up and people doing very interesting things where you're paid in like an on-chain

17:32Nvidia stock or something just for holding another crypto token. I think moving forward we're going to live in a world where tradfi gets left behind a little bit because everything else is moving very quickly when it comes to more specifically using assets as security or collateral. Especially in like a way that it's just seamless and quick. Like it's all every sense counted for but it just enables a whole different layer of settlement right. Like that's the benefit. Yeah, people want things quickly now. Yeah, yeah, yeah. Everyone wants everything right now. Yeah, and if we don't keep up, like if legislation doesn't keep up, if we don't keep up with the US, I think it's going to be very difficult for us to compete here and for us to serve, you know, really great products to our customers and users. Yeah, okay. And I think like one thing to always just call out like, yeah, we, I think we've covered it pretty well. Like these products do have a risk innately. Like we've talked about, you know, the leverage to value ratio, the LVR blowing up because the underlying assets falling.

18:33Do you feel like there's other key risks that people need to know when they're looking into these products? Because obviously everyone can think about a cool piece of the benefits, but you know, I think it's just as important to know the other side right now. Yeah, yeah, we're in a regulated industry in Australia. So, you know, the products that SwiftX puts up, we have to play in that arena. So, you know, I think the big things to recognize and to look into are always the things that you would look into when you're looking at any loan. So the interest rate being the main one. But then also the LVR, you know, you need to keep an eye on that. At SwiftX in our new loans product, we will notify you when your LVR changes between different steps as well. So we'll send you emails and we'll have people calling you just to let you know what's going on with your loan if you need to take any action. And then if you do hit like 60% threshold on your LVR, then we will send you an email. We'll give you a call as well and we'll tell you the next steps on what you need to do. You know, we'll give you a lot of time to do that too. So we'll give you 30 days to actually, you know, bring that LVR down to a safer rate from 60%.

19:37And if Bitcoin in the meantime goes up and it reduces below 60% on its own, then you're fine. And the key distinction is like that's obviously with, you know, a product like the one that we're doing at SwiftX. If this was DeFi, what would be like the experience? I think you're on your own. Yeah. You might get a push notification and you know, things come from the app and things can move really quickly, you know, on chain and DeFi and, you know, your responsible for your own decisions. That's the difference. That works there, right? You kind of are your encounter partner. Yeah. So here we like to, you know, we like to help out our customers and our users as much as possible. And so when you think about the average person trying to weigh up, is it something right for them? Like what do you think are just general things that people should consider, like not advice in any way, but just, you know, if you're sitting down trying to make any decision, like what do you feel like are the key things people should ask themselves before they look at these sort of products? Yeah. So there are a few things. There's this document called the TMD or the target market termination, which outlines which users should be not should be using, but which users can actually use this product.

20:41You need to be over eight handed, you need to hold crypto assets and you need to know that crypto fluctuates basically on price all the time and it can fluctuate pretty heavily. So the best thing to do is to really just jump on a swift axe, look at the landing page, understand what the product is about. And if you do have questions, just reach out to us. Yeah. There are plenty ways to contact us either through the website or by signing in as a user and just getting into live chat and asking us some questions and we'll be happy to help. Mate, that's good. Well, that's been insightful for everyone. I think this is going to probably kick off a new series for us where we're just going to start to explore some of these new opportunities. They're going to be opening. I think for everyone as we start to see the whole industry sort of come into this new world of blockchain and tokenization and everything else that's going to be unlocked with the regulation that we're seeing coming. So I think we're excited to probably get, yeah, it's just some special guests in to keep this chat going and just get everyone feeling comfortable with some of the language that they're hearing. Because for a lot of people this is all going to be pretty new, even though hopefully today we've broken it down a pretty simple way.

21:44Because I can't let you get away that easily, even though you've probably grilled you enough today, but price prediction mate, Bitcoin, what do you think we're going to get to the next cycle? Mate, I reckon, I don't know if I had to pick a number. I'd say we go north of 200. Yeah, yeah. I think people would be disappointed otherwise, but we'll see what happens. I think there's a lot of geopolitical uncertainty at the moment. There's a lot of things that need to line up for it to go higher than that, but let's see. Maybe less drawdowns and yeah. Well, history's told us at least one thing. Maybe we've got the timing wrong of the bottom, but it's usually like a thousand odd days that the market starts to trend for us. A long way to go. A long way to go. That's a long way to go. That's a long way to go. Thank you so much for joining us. I'll see you in the office, obviously. But yeah, for those of you who want to know more, yeah, check out the SwiftX website for more information. You can also give us a message as well if you've got any questions or want to ask Chris anything in particular. Thanks, Pave. Thanks for having me, mate. Thank you. See you guys next time.

22:55You