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Recent political and financial market developments have accelerated bitcoin’s emergence as an institutional asset. With ETFs and public companies adopting bitcoin treasury strategies, access to bitcoin exposure has never been easier for newer and larger pools of capital. However, while corporate adoption and bitcoin securitization are exciting milestones, a necessary piece of market structure remains in its infancy: collateralized credit.
Unchained is the longest-tenured, continuously operating lender in the bitcoin industry. We agree with those who have labeled bitcoin “pristine collateral” due to its monetary properties. We made our first bitcoin-backed loan in June 2017 and our collaborative custody model was born out of our founders’ desire for the most secure solution for bitcoin collateral. We would like to highlight the principles that have and will continue to inform our loan product development.
Prior to the origination of a loan secured by any form of collateral, ownership and control reside with the would-be borrower. In order to secure a collateralized loan, the borrower must provide the lender with access to the collateral. This is required to ensure the lender is able to be repaid by liquidation in a default. To use a technical term, the borrower must hypothecate the collateral.
The Oxford English Dictionary defines hypothecate as “To give or pledge as security; to pledge, pawn, mortgage,” and cites an example from 1693 where future produce is pledged as collateral for rent. The word traces its roots to Latin and Greek terms for a “pledge.” While there are forms of collateral (e.g., your home or automobile) that do not require you to give up possession, liquid, volatile forms of collateral such as stocks and bitcoin require borrowers to give up control in order to assure the lender that they will be able to recoup sufficient value in a default. I will use the terms hypothecate and pledge interchangeably in the rest of this article.
While it is necessary that borrowers surrender control of their bitcoin via hypothecation, prudent borrowers should diligence the custody solution and the party that will hold the bitcoin for the duration of their loan. When collateral is not re-pledged, or hypothecated again (rehypothecated), this is a relatively simple exercise. However, if collateral is rehypothecated by being sent to third parties, those counterparties and custody solutions must also be diligenced along with the terms of service that govern the relationship between a lender and third-parties who hold the bitcoin collateral.
Unchained recognizes the value of simplicity and remains committed to not rehypothecating bitcoin collateral. Bitcoin pledged as collateral for an Unchained loan is stored on the bitcoin blockchain in a 2-of-3 multisig address with the borrower, Unchained, and our key agent each holding one key. Never rehypothecating collateral and working with a professional key agent simplifies the number of risks that borrowers have to assess. Unchained’s collaborative custody model is the result of years of work developing and maintaining our unique technology infrastructure.
This is the real power of an Unchained loan–our borrowers always have the ability to audit their collateral and ensure it is never rehypothecated. I believe Unchained puts borrowers as close as possible to their bitcoin securing the loan.
Our unique collaborative custody model and commitment to non-rehypothecation has implications for our business. Like other non-bank lenders, Unchained must secure lending capital from third parties such as asset managers, funds and banks. While it would be easier to secure lending capital by sending borrower bitcoin to third-parties, Unchained remains committed to a true non-rehypothecation loan product. We have an excellent track record and operational model that has allowed us to originate thousands of loans and over $1 billion in volume. This “proof-of-work” is meaningful to our funding partners.
While bitcoin can be held in a manner that is radically trust-reduced when compared to the fiat financial system, borrowers make a trade-off when they take a bitcoin-backed loan to access liquidity. Instead of seeking liquidity by simply selling bitcoin, borrowers can access liquidity now while preserving ownership and potential appreciation from their pledged collateral. In exchange, borrowers must surrender control of their bitcoin to a lender.
When control is surrendered, no assurance can provide an iron-clad guarantee that a lender will not breach a contract or seize your bitcoin–not from the blockchain, a contractual loan agreement, or a user interface. The reason that Unchained borrowers only hold one out of three keys during a loan is precisely so they do not have control. The lender must have control in case the borrower does not perform.
A trusted counterparty is implicit to a lending relationship. This is why Unchained’s track record is important. We have been lending since 2017 and have facilitated thousands of loans, in excess of $1 billion. Beyond lending, thousands of clients trust us to help them secure their bitcoin for generations. Finally, we are bitcoin-only.
Our “low time preference” core value demands that we navigate our relationships and decisions with the long-term in mind. Bitcoin financial services require substantial trust. We would not have a business without your trust and we strive to earn it every day. In bitcoin terms, one can think of Unchained’s lending track record as the longest proof-of-work chain in the bitcoin-backed lending business, the one with the greatest cumulative difficulty. As we approach bitcoin block 1,000,000, it is worth noting that Unchained issued our first loan prior to block 480,000!
Lending was Unchained’s first product and we believe in the bright future of bitcoin-backed lending now more than ever. This product is not an accommodation. It is a core financial service required by bitcoiners and our mission is to be the best lender in the world. As new entrants join the lending ranks, it can be helpful to think through the borrower-lender relationship from first principles. Non-rehypothecation and transparency will remain our core lending principles and guide our product development. We remain grateful to our clients for their trust.
Unchained Capital, Inc. (NMLS ID: 1900773), B&C Lending LLC (NMLS ID: 2656661), and Bitcoin Collateral Services LLC (NMLS ID: 2423070) are licensed to provide certain financial services. Loans may be made or arranged pursuant to a California Financing Law license. Other restrictions and limitations apply. For more information, visit unchained.com/loans. Loans are subject to approval. A loan application is required. Lending services are available to U.S. residents. Lending services may not be available in all states.
