Revealing the leading players in the digital asset lending industry: Genesis, BlockFi, and DrawBridge

Written by: Kevin Yang, Cara Cao, Leo Zhu, Damon Shen, all employed at digital asset management company IDEG

Since the beginning of the year, a sudden pandemic has swept across the globe. The world economy, which fell into a recession during the "great lockdown" in April, is currently recovering slowly. However, as the pandemic continues to spread, many countries have slowed down their economic reopening processes, and some have re-implemented partial lockdown measures to protect vulnerable populations. The World Bank's "Global Economic Outlook" report released in June this year predicts that the global economy will decline by 5.2% in 2020, marking the "most severe economic recession since World War II."

In response to the pandemic's global spread and the sharp decline in capital markets, central banks around the world have adopted unprecedented "quantitative easing" policies. On March 15, the Federal Reserve announced it would lower interest rates to zero and launched a massive $700 billion quantitative easing program. The Federal Reserve's total assets rapidly expanded from $4.16 trillion at the end of February to a peak of $7.17 trillion on June 10. As of October 28, the Federal Reserve's total assets still exceeded $7 trillion.

According to Morgan Stanley's analysis, the total assets of G4 central banks will reach $25 trillion by the end of 2020. It is expected that this figure will further rise to $29.30 trillion by the end of 2022.

Data source: Morgan Stanley

The other side of quantitative easing is the significant decline in interest rates. According to the IDEG data engine, interest rates in major developed countries have fallen below or approached 0, with the Swiss National Bank's rate even reaching an incredible -0.75%.

Data source: IDEG

Represented by the BRICS countries, interest rates in developing countries have also continued to decline.

Data source: IDEG

British Prime Minister Winston Churchill once said, "Never waste a crisis." In the era of the COVID-19 pandemic combined with quantitative easing, some Smart Money has found greater opportunities in the interest rate market through digital assets.

1. Overview of the CeFi Lending Market

We say that 2020 is the "true" institutional year for digital asset investment. This is not only reflected in Grayscale's trust products surpassing $10 billion in total assets but also in the rapid development of the digital asset lending market. The extremely high yields of DeFi lending projects have attracted so much attention that the development of the CeFi market has been overlooked by many.

In its second-quarter report on the lending market, Credmark compiled data from 85% of lending companies. The report shows that in the second quarter of 2020, the outstanding loan size in CeFi reached $4.632 billion, a quarter-on-quarter increase of 90.62%; during the same period, the value of collateral exceeded $8 billion, a quarter-on-quarter increase of 87.34%.

Data source: Credmark

Institutional clients dominate the CeFi lending market. In the second quarter of 2020, the ratio of outstanding loans between institutions and retail was 3.5:1; during the same period, the ratio of collateral value between institutions and retail was 2:1. The difference in the ratios of outstanding loans to collateral value indicates that institutional clients indeed have a very obvious advantage in terms of collateralization rates.

Data source: Credmark

2. Major Players in the CeFi Lending Market

Genesis Trading

Genesis Trading is a subsidiary of the DCG group, integrating various businesses such as OTC, derivatives, lending, and custody. Genesis originated from the trading department of SecondMarket. DCG founder Barry Silbert established the private equity trading platform SecondMarket in 2004 to provide a trading platform for equity held by employees of private companies and early investors. It quickly grew alongside the development of Silicon Valley tech companies like Facebook, and its equity business was acquired by the Nasdaq exchange in 2015. In the years prior, Barry Silbert had developed a strong interest in Bitcoin, having invested $175,000 of his personal funds in 2012 to buy Bitcoin at $10 and selling in batches when the price reached $50, leading to substantial profits that prompted him to take more action in the market. Barry Silbert directly pushed SecondMarket to establish the precursor departments of Grayscale and Genesis Trading, and retained these businesses when SecondMarket was acquired. In 2015, Barry Silbert integrated these two major segments with his personal investment business to establish DCG, officially starting his "whale" journey in the cryptocurrency industry.

Genesis has done its homework on compliance, holding a series of licenses including Broker-dealer and BitLicense. Its strong compliance and first-mover advantage have made Genesis the undisputed leader in the digital asset lending market. In the third quarter of this year, Genesis's new loan volume surged by $5.2 billion, a quarter-on-quarter increase of 136%, setting a record for the largest quarterly increase. By the end of the third quarter, the outstanding loan size reached $2.1 billion, a quarter-on-quarter increase of 50%.

Data source: Genesis Trading

In terms of deposit business, Genesis has also developed rapidly. In the third quarter of this year (especially in September), a large number of institutional investors deposited assets into Genesis. The number of institutional clients in the deposit business increased to 165, a quarter-on-quarter increase of 47% and a year-on-year increase of 275%.

Data source: Genesis Trading

Additionally, to broaden its lending, trading, and custody business lines, Genesis has acquired Qu Capital and Vo1t. Qu Capital is a quantitative investment company that, after being acquired by Genesis in September 2019, greatly enhanced Genesis's technical strength in trading and lending products. In May 2020, Genesis successfully acquired Vo1t, incorporating custody services into its portfolio. Since then, Genesis has completed the final piece of the puzzle, integrating its various businesses into a prime brokerage service.

BlockFi

BlockFi was founded in 2017 and has received investments from several top institutions in the industry, capturing a significant share of the retail lending market in Europe and the United States over the past two years. Currently, BlockFi is targeting the institutional market while actively expanding in the Asia-Pacific region. Founder Zac Prince has years of experience in online lending platforms. Interestingly, during a Reddit AMA, Zac revealed that he is a successful professional poker player.

In August of this year, BlockFi completed a $50 million Series C financing round, led by Morgan Creek Digital, with participation from CMT Digital, Castle Island Ventures, and Winklevoss Capital. The announcement stated that the new funds would be used to expand the team and further extend BlockFi's business scope, including the upcoming launch of a "Bitcoin rewards" credit card. Additionally, it is worth mentioning that BlockFi's custodian is Gemini, making its investment from Winklevoss Capital understandable.

Data source: IDEG

While BlockFi may not be the largest in terms of business volume, it stands out in terms of business innovation. Through the extension of its lending business, BlockFi has become the largest shareholder of Grayscale's Bitcoin Trust (GBTC). As of October 2020, BlockFi held a 5.07% stake in the GBTC trust. Based on market prices at the time, this asset was approximately $328 million. As BlockFi founder Zac stated, investing in GBTC is one of its efforts to better serve its clients.

DrawBridge Lending

DrawBridge Lending has garnered significant attention in the industry due to its team's deep traditional finance background and shareholder profile. Founded in 2018, DrawBridge is a compliant commodity trading advisor (CTA) and commodity pool operator (CPO) certified by the U.S. Commodity Futures Trading Commission (CFTC). The DrawBridge team has long been engaged in the traditional finance industry, possessing rich experience in trading, brokerage, lending, law, and finance, and is known for its innovative derivatives investment strategies. DrawBridge has strong capabilities in structured products and has launched digital asset commercial loans/high-net-worth individual loans, hybrid investment loans, and personal retirement account loans (Crypto IRA Loan). DrawBridge's lending advantages include low interest rates and no "margin calls." According to data disclosed on its official website, as of July 2020, DrawBridge's assets under management had exceeded $150 million.

On November 13, 2020, U.S. digital asset commercial bank Galaxy Digital announced the acquisition of DrawBridge and another market maker, Blue Fire Capital. Galaxy Digital is the world's first multi-strategy commercial bank focused on the digital asset sector, operating in various areas including investment, trading, consulting, securities brokerage, and asset management. The company was founded by Wall Street legend billionaire Mike Novogratz, aiming to build the "Goldman Sachs" of the digital asset field. Mike Novgratz was previously the Chief Investment Officer of hedge fund giant Fortress Investment Management. This acquisition holds significant strategic value for Galaxy Digital Trading (GDT), one of Galaxy Digital's four main business lines, which has an annual OTC trading volume exceeding $4 billion and occupies a considerable share of the institutional market. By acquiring DrawBridge, Galaxy Digital will greatly enhance its capabilities in lending and structured financial products.

Industry Outlook

In addition to the three institutions mentioned above, there are many other well-known players in the digital asset lending field. For example, in the Asia-Pacific region, there are several institutions such as PayPal Financial, Matrixport, and RenrenBit, which occupy a major share of the Asia-Pacific market. In the Europe and the U.S. region, companies like Coinbase, BitGo, and even Blockchain.com are actively exploring the lending market. According to official news on November 24, 2020, Japanese financial giant SBI Group officially launched digital asset lending services through its subsidiary SBI VC Trade. As more institutions from both inside and outside the industry enter the market, the digital asset lending industry is beginning to enter a phase of intense competition.

As traditional market players gradually enter the scene, we see that the capital from two markets (traditional capital markets and digital asset markets) is accelerating its integration. The massive low-cost funds from the era of quantitative easing have completed interest rate arbitrage through digital assets, also creating the current boom in both DeFi and CeFi markets. The future industry ecosystem will resemble organisms in a spore game, rapidly reproducing, iterating, and evolving with the influx of traditional capital as a catalyst. The prosperity of the lending market will also greatly enhance the influence of digital assets in the traditional world, thereby promoting the sustainable development of the entire industry.