The concept of lending has been a staple in institutional finance for centuries. Generally speaking, there are two types of loans circulating through mainstream finance. One involves a private or business entity taking out a cash loan from a financial institution and paying interest until the debtor can return the principle in full. The other comes in the form of government bonds, where citizens exchange their cash for central bank notes and are given interest payments so long as the government holds that cash.
While these are some of the foundational concepts of finance, seeing them applied to the crypto market seemingly overnight has created tremendous buzz among cryptocurrency enthusiasts. Most recently, Binance, one of the world’s largest crypto exchanges, has launched a lending program similar to that of central banks. As of August 28, Binance Lending is allowing users to lend their Binance Coin (BNB), Tether (USDT) or Ethereum Classic (ETC) coins to the exchange and receive interest payments.
As evidenced by the scarce selection of tokens available for the lending process and the two-week fixed maturity term that Binance is offering, the project is still in its earliest stages. Nonetheless, given the size of the Binance platform, it pays to consider what this could mean for mainstream finance in the months and years to come.
Ever since their inception, cryptocurrencies have been viewed as an alternative to government-issued fiat money. Some, like the Bank of England governor Mark Carney, believe that a central-bank tethered digital currency could eventually replace the U.S. dollar as the world’s reserve currency. Others think that tokens have the potential to do away with government currencies altogether and become a primary means of exchange.
Although Binance’s “bond-style” lending program has made waves, it’s also worth noting that cryptocurrency loans from private finance firms are already available in a nascent form. Similar to how a private bank would issue a mortgage to an individual and receive interest until principal is returned, these companies lend a fixed amount of cryptocurrency to the debtor and are likewise reimbursed with monthly interest payments.
With this in mind, it appears that cryptocurrencies are slowly but surely making their way into these two staples of mainstream finance. While both forms of crypto lending are still in early development, it’s a momentous leap when one considers that crypto sported a fringe status among many economists not too long ago. Now, the case for cryptocurrencies pushing fiat out of the way and becoming the norm appears to strengthen with each passing day.
While all of these developments hold tremendous bullish potential for the crypto market, the lending services provided by exchanges offer a particularly exciting prospect to the long-term oriented crypto enthusiast. Instead of merely “HODLing” their tokens and waiting for a price jump, these individuals will soon be able to lend their coins to an exchange and earn interest without any risk. Should the lending services by exchanges proceed and expand as planned, government bonds could soon find themselves faced with a major safe-haven competitor.