The last several years in the cryptocurrency industry have certainly seen a lot of ups and downs–the massive swell at the end of 2017, the doldrums of 2018, and the recovery of 2019.
However, despite the volatility in most of the cryptocurrency industry, a few corners of the industry have managed to continuously grow. One of these is the crypto lending sector. In early 2019–after one of the crypto markets’ lowest points in months–NY-based crypto lending company BlockFi reported that both its revenues and customer base had increased to the tune of 100 percent since June of 2018, when Galaxy Digital Founder Mike Novogratz invested $52.5 million in the company.
At the time–almost exactly one year ago–Zac Prince, the company’s chief executive officer, said that the practice of crypto lending is a “low-risk type of lending,” and claimed that BlockFi had never suffered any principal losses.
Recently, Finance Magnates sat down with Zac Prince to speak about what’s happened in BlockFi’s journey throughout 2019, as well as the evolution of crypto lending, his own company, and the influence of DeFi lending platforms on the crypto lending space.
“The market has improved in a lot of ways, in terms of the financial services infrastructure, in terms of regulation, in terms of market participants; but since early 2018, it’s also been in a bit of a downtrend, at least in relation to the all-time highs that were hit in the back half of 2017, when we had that ‘bubble-type’ level of excitement,” Prince told Finance Magnates.
However, Prince explained that like other firms that offer crypto lending services, BlockFi has managed to keep growing through the ups and downs of the cryptocurrency markets over the last two years. He attributes this growth to the idea that BlockFi is “bringing things into this market that didn’t exist before.”
Specifically, “the ability to borrow money secured by your cryptocurrency as collateral, and the other being the ability to earn interest on your cryptocurrency holdings–[these] were things that didn’t really exist until we brought them to the market in BlockFi–at least, not on the scale that we’re doing it, and not for retail investors.”
Plans for the year ahead
Prince said that the things that BlockFi has planned for this year are “part of bigger trends that we’re going to see in the cryptocurrency space–increasing adoption (on both the institutional and retail levels), increasing integration of the cryptocurrency of the cryptocurrency ecosystem with traditional financial services, and making… cryptocurrency look and feel very similar to what exists in the traditional financial world.”
“All those things, in my view, are going to be very positive for the sector overall,” he continued, adding that BlockFi believes that 2020 will be “another breakout year for the sector.”
— Zac Prince (@BlockFiZac) January 14, 2020
“Fundamentally, we see the company going from phase one into phase two, with the big difference between those two phases being that in phase one, we only had products for folks that already own cryptocurrency–so, you [couldn’t] get a loan secured by your cryptocurrency or earn interest on your cryptocurrency if you [didn’t] have any cryptocurrency,” he explained.
“In phase two, we’re going to have products that make it possible for someone to own cryptocurrency for the first time using Blockfi’s platform,” he said.
“The two big things that we’re doing around that this year are that we’re launching a trading functionality on our platform that looks and feels a bit more like a robo-advisor versus a traditional exchange. It will give someone the ability to connect their bank account and buy their first $100 or $1,000 $10,000 worth of cryptocurrency using our mobile app.”
— BlockFi (@TheRealBlockFi) January 1, 2020
The company is also launching a Bitcoin rewards credit card, which Prince described as “a normal credit card, just like your Chase Sapphire Reserve or your [average] hotel or airline credit card that gets you points, except instead of earning normal cashback or airline miles based on how much you spend on the card, you’ll be earning Bitcoin.”
He went onto explain that BlockFi has hopes that the card will bring new BTC users into the space: “it’s [an easy] way for folks who don’t own cryptocurrency yet and haven’t been able to ‘cross the chasm’ of taking their own money to buy some Bitcoin…to start to get exposure to the asset class.”
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However, in order to facilitate possible growth of retail investors and users on BlockFi’s platform throughout 2020, Prince explained that onboarding more institutional users onto the platform is critical: “it’s critical to the delivery of our products to retail [users] that we have institutional connectivity,” he said.
Insightful thread from Cuy who is one of the crypto leads at Visa https://t.co/1bjRuFGca5
— Zac Prince (@BlockFiZac) January 6, 2020
For example, when BlockFi is paying interest on Bitcoin that users hold with the company, “the reason we’re able to do that is that we lend Bitcoin to institutional borrowers of cryptocurrency–and we think of both of those participants as clients.”
”The world of DeFi has been growing quickly,” but it’s still far behind the world of centralized finance platforms
“Conceptually, I think that ‘DeFi’ is going after this idea that finance should be as open as the internet–and it doesn’t matter where you’re from or how much money you have, you should be able to access the same product that someone who’s in a different place with a lot more money is also accessing.”
“Functionally,” he continued, “the companies or projects that have associated themselves most closely with the term ‘DeFi’ today can be categorized in two ways: number one, they’ve built the core part of their technology platform using a blockchain-based infrastructure, primarily Ethereum.”
Therefore, “when you’re interacting with these platforms, what you’re interacting with is smart contracts built [using] native, blockchain-based coding languages that are open-source and publicly available,” Prince explained. “So, you can interact with one of these projects and then go and audit the code if you want to, because it’s built on a blockchain.”
The second thing that characterizes DeFi platforms, according to Prince, is that “they don’t do KYC (know-your-customer) [checks].”
“The world of DeFi has been growing quickly, and there are some really cool things happening in DeFi–but today, it’s ultimately a fraction of the size of businesses like BlockFi and traditional regulated exchanges in the crypto world.”
Operating as a centralized platform allows for faster development and access to more capital, says Prince
“Three are differences in terms of how BlockFi operates versus DeFi in that we are regulated; so, we do KYC, which–on the one hand–is annoying, because in order for someone to use our products, they have to give us their information and we have to make sure we know who they are, versus DeFi, where you can just go and use it.”
However, “on the other hand, it’s been very helpful to us in that we’ve been able to raise large amounts of different types of institutional capital if we weren’t taking the regulatory and compliance steps that we’ve taken.”
Additionally, “it’s enabled us to bring products to market that we wouldn’t be able to bring to market if we weren’t similarly regulated; for example, the credit cards and the loan products, and having bank account connectivity with all of those. None of those things happen with DeFi currently.”
Prince also explained that having access to a greater pool of capital and connectivity to financial institutions has also allowed companies like BlockFi to develop faster than DeFi platforms: “we started last year at BlockFi with one product, we ended the year with three; we’re starting this year with three, we’ll end the year with five.”
“Because we’re using ‘tried-and-true’, developed infrastructure components when we’re building our products, we’re able to–at least today–iterate and develop things much faster than the speed of development that you see in the DeFi world.”
Excited to see this launch / scale. Crypto industry has significantly less access to low cost debt capital vs more mature industries. Great work @Bitstamp and @silvergatebank @SilvergateCEO https://t.co/R9FHHvaYqI
— Zac Prince (@BlockFiZac) January 15, 2020
However, “in general, right now in the crypto ecosystem, we’re still very much in the early stages, and it’s a sort of ‘one-team-one-dream’ mindset. Everything that’s happening, assuming it’s not fraud, is a net positive for the space.”
But how will decentralized lending platforms continue to operate alongside centralized lending platforms like BlockFi in the future? After all, “DeFi primarily exists in the lending world, which is the primary world that BlockFi has operated in so far.” Could these two kinds of entities potentially threaten one another?
Prince doesn’t think so–“I think what we’ll see in the lending world is similar to what we’ve seen in the exchange world, which is that centralized and decentralized exchanges co-exist,” he said. “The centralized exchanges are ultimately [much] bigger than the decentralized exchanges, but they both serve a very valuable purpose.”
This is an excerpt. To hear more of Finance Magnates’ conversation with Zac Prince on BlockFi, DeFi, and regulations affecting crypto in the US, visit us on SoundCloud or Youtube. Special thanks to Zac and the BlockFi team.