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As financial markets continue to pivot toward digital assets, investors and lenders need to understand how they can use these new asset classes in various financial arrangements. One such arrangement is digital asset collateralization, which allows borrowers to use digital assets as collateral for a loan from a financial institution.
With digital asset collateralization arrangements, financial institutions can tap into the growing pool of digital asset value while also mitigating risk of collateralizing the loan with a physical asset. This arrangement is similar to other collateralized loans, such as those using real estate or vehicles, but with digital assets as the underlying collateral.
These digital assets can range from cryptocurrency to digital art and are held in a wallet at a state-chartered trust company. The assets are then used as collateral for a loan from a financial institution. If the borrower defaults on the loan, the financial institution can sell the digital assets to maintain their collateral position in US Dollars.
This type of lending arrangement is still in its early stages, but as digital assets continue to grow in popularity and value, we expect to see more financial institutions offering digital asset collateralized loans.
At Sequoir, we are a leading digital asset custody and collateralization services provider in the blockchain space. Our team works with financial institutions to help them set up these lending arrangements and provide the infrastructure necessary to hold and transfer digital assets securely.
If you're interested in learning more about digital asset collateralization or how Sequoir can help your financial institution, read on to learn more about this growing trend.
To understand digital asset collateralization, it's first important to understand the concept of asset collateralization.
Asset collateralization is the use of an asset as collateral for a loan. This type of loan is typically secured by a physical asset, such as real estate or a vehicle. The asset serves as security for the loan, meaning that if the borrower defaults on the loan, the lender can seize the asset to recoup their losses.
Asset collateralization is common in many industries and has been used for centuries. It's a way for lenders to mitigate risk by collateralizing a loan with a physical asset, and it's also a way for borrowers to access capital that they may not otherwise have access to.
Digital asset collateralization works in much the same way as asset collateralization, but digital assets serve as the loan collateral. These digital assets can include cryptocurrency, digital art, or any other type of digital asset.
The digital assets are held in a secure digital wallet and are held by the financial institution as collateral for the loan. If the borrower defaults on the loan, the financial institution can sell the digital assets to recoup their losses.
Almost any type of digital asset can be used as collateral for a loan. Some of the most common types of digital assets that are used as collateral include:
Cryptocurrency: Cryptocurrency is a digital asset that uses cryptography to secure transactions and control the creation of new currency units. Bitcoin, Ethereum, and Litecoin are all examples of cryptocurrency.
Non-Fungible Tokens: Non-fungible tokens (NFTs) are unique digital assets and cannot be replaced by another asset. NFTs are often used to represent ownership of digital assets, such as art, music, or other digital media.
You can also collateralize digital assets with smart contracts. Smart contracts are self-executing contracts that are written in code and stored on a blockchain.
Financial institutions can use smart contracts to collateralize a loan much like other digital assets. The key difference is that smart contracts can automatically enforce the loan terms, such as loan repayment, without the need for a third party to mediate. This type of loan is often referred to as a "decentralized" or " trustless" loan, as it does not require the borrower to trust the lender with their digital assets.
There are many benefits to developing a digital asset collateralization program for your financial institution. Some of the most notable benefits include:
Increased Lending Options: By collateralizing loans with digital assets, you can expand the types of loan products that you offer to your customers. This can attract new customers and help you grow your business.
Reduced Risk: Digital asset collateralization can help to reduce the risk for your financial institution. This is because FIs can sell the digital assets immediately, programmatically, and at any time to recoup losses if the borrower defaults on the loan.
Improved Customer Relationships: Offering digital asset collateralization can help you build greater relationships with your customers. This shows that you're willing to work with them to find a solution that meets their needs.
Emerging Tech Branding: Offering digital asset collateralization can help you position your financial institution as a leader in the emerging technology space. These moves can help you attract new customers and build brand awareness.
If you're interested in offering digital asset collateralization to your customers, Sequoir can help. We offer a platform that makes it easy to collateralize loans with digital assets.
Sequoir will work with you to develop a digital asset collateralization program that meets your needs. We'll help you choose the right digital assets to collateralize your loans and create a Digital Asset Control Agreement™. We will also help you establish digital wallets to store the digital assets.
Building a digital asset collateralization program with Sequoir offers a variety of benefits, such as:
Contact us today to learn more about Sequoir’s Collateral service. Our team can help you develop a program that meets your needs.