Mauricio, Co-Founder and CSO of Ledn joins me on the show to talk: 

• Why use bitcoin backed loans? 
• Fiat loan rates vs bitcoin loan rates
• Opportunities and risks
• New products and structures for home loans
• Dealing with margin calls and liquidation
• Stablecoins: are they essential? Where is the market going on this? 

Links:

• Twitter: @cryptonomista 
• Site: Ledn.io 

Other episodes:

• SLP236 Nic Carter Stablecoins: Bullish Or Bearish For Bitcoin?
• SLP291 Caitlin Long – Stablecoins, Bitcoin, & The Fed

Sponsors: 

• Swan Bitcoin
• Hodl Hodl Lend
• Compass Mining
• Braiins.com
• Unchained Capital (code LIVERA)
• CoinKite.com (code LIVERA)

Stephan Livera links:

• Show notes and website
• Follow me on Twitter @stephanlivera
• Subscribe to the podcast
• Patreon @stephanlivera 

Podcast Transcript:

Stephan Livera:

Mauricio, welcome to the show.

Mauricio Di Bartolomeo:

Thank you, Stephan. It’s great to be here.

Stephan Livera:

So Mauricio, I know you’ve been doing a lot of things with Ledn, and you’ve recently had a big raise, $70 million on $540 million valuation series B. So, really big stuff. And you’ve got some interesting products coming out and I’m interested to talk with you a little bit about that as well as the industry around Bitcoin and finance and how are these worlds colliding? So for listeners who don’t know you, can you just give us a bit of a background on yourself and how you came to start Ledn?

Mauricio Di Bartolomeo:

Yeah, very happy to. So I was born and raised in Venezuela. That’s where I got my education on inflation—growing up in a place like Venezuela. My dad was a very entrepreneurial person, so I always wanted to be an entrepreneur. And I used to think—or I try to think of things in a very pragmatic terms—so when I was really young, I thought to myself, Well, if I want to build wealth, and if I want to, you know, make money, the first thing I should start by doing is understanding how money works. I used to believe that if you understand how something works, you have an easier time getting it, or planning around building something that will get you that. And so in a place like Venezuela, fortunately, or unfortunately, trying to find out how money works leaves you with a lot more questions than answers. And as I was going through that journey, I kind of became obsessed with getting the right answers for what money was and how money worked. And that’s how I ended up going to school for finance and economics. And as I understood money more and more, I shifted from economics to finance. And around that time it was like economics—I was trying to understand supply and demand, but then you start understanding there’s way more to it. There’s bond issuance. And so you start getting into structured finance and bonds, and then how that interlays with equities markets and how that whole thing interlays with property prices and how something as simple as raising the yield on a treasury note can go and impact the prices of turkey, right? And so trying to understand all of those connections kind of kept leading me through my education and that’s why my formation or my education is in finance. And I did my Master’s also in finance as well. In Venezuela, as the country was falling apart, many families decided to send their most willing child abroad in case things went south, then your family had a way out of the country. And that was me in my family, and that’s how I ended up in Canada. And in my undergrad—17 years ago now—is where I met Adam, who became a really good friend and is a co-founder of Ledn today. And in fact, many of the people that work with us at Ledn today went to school with us, they’re peers, or university peers, from Canada. And the sort of genesis of Ledn came, or sort of the aha moment happened, and it was a collective exercise between Adam and myself, because we each brought experience on two different sides of the world that we kind of married to build Ledn. And how I come into the picture is in 2014, when Venezuela was going off a cliff, the communist party essentially took over the country by force. They stole the elections, and that that triggered the greatest exodus in Latin America’s history, which was the migration out of Venezuela. And it was around that time where my youngest brother was graduating in university, and I had already made the decision to kind of come spend a few years in Canada because I thought things were going really, really south. But my brother didn’t want to leave. He wanted to stay. And he kept pitching my dad on these business ideas to stay in the country. And they were all very risky. Everyone else was leaving. He was staying. And my dad says he was getting frustrated, because we weren’t approving any of his ventures. So anyway, long story short, he starts mining Bitcoin. And this was summer of 2014, I believe. In Christmas of that year of 2015, I saw his machines were doing great, and he was doing great in an environment when everybody else was literally crying and selling and liquidating their assets to leave the country. So I started helping a lot of people—when I saw that, many people in Venezuela started wanting to mine, we started helping people how to mine. And through that time, it became very clear that the only way to grow the mine was to sell your Bitcoin, and people didn’t want to sell their Bitcoin. And so we immediately clued into this idea that there was a big demand for financing products for Bitcoin, for Bitcoin businesses, Bitcoiners, anybody that had contractors, freelancers, anybody that had earned Bitcoin that wanted to access some of that wealth but didn’t want to sell it. It was a bad decision time and again throughout time. And so we knew that there was a group of people that were very incentivized to not sell the Bitcoin. Adam’s side of the equation is he had been financing renewable energy projects for a decade. And he had seen investors not understand renewable energy projects 10 years ago, to essentially fighting over each other for a 2%-3% yield product at the end to finance these deals, because they understood the technology and they provided great return. And so with Adam’s experience in financing and my experience in the sort of Bitcoin community and the Bitcoin industry and how we could articulate this value prop to Bitcoiners, we kind of joined forces and built a team, raised a seed round, and our premise was to underwrite Canada’s first Bitcoin backed loan. And we did that in November, 2018. And from there on out we’ve created a plethora of other complementary products, but that’s our flagship product still today.

Stephan Livera:

Fantastic. And so as you were saying, those of us who are Bitcoiners, we are very reluctant to sell our coins and would much prefer to use fiat where possible. And so in cases where we can access a reasonably priced fiat loan—well, there’s a benefit there. And then on the other side, the fiat lender—where are you getting that money from? Well then what’s the appeal for that person?

Mauricio Di Bartolomeo:

So the appeal for that person is, in a world that is starved for yield, is that a company like Ledn can offer somebody that funds those loans a really attractive interest rate at a really great track record. We have 0% loan losses from our inception. And the lender in this case, the lender of those dollars, is basically getting a yield that is in many times 5-7 multiples of what they can get traditionally at a bank, working with a group or with a party that has I think very comfortable assurances that—basically, as long as they’re comfortable with the risks that they’re undertaking by lending us the capital so that we can lend it out to our clients, then they will be earning a much better return than if they would just leave it at a traditional financial entity.

Stephan Livera:

As you were saying, in terms of the demand coming from essentially Bitcoiners and people who are engaged in various types of Bitcoin businesses, for example, Bitcoin mining, these are the typical profile or customers that you have. And so would you say this is typically for longer time HODLers, or actually is it a mix there?

Mauricio Di Bartolomeo:

There is. So I would say predominantly, the people that are using these services are people that have built Bitcoin wealth, whether it’s over the last cycle or over the last two years, they have done relatively well. And they now want to be very effective and efficient at how they manage that wealth. They want to be tax efficient by taking out a loan. They want to make sure that continue to earn on those assets by putting them on a savings account, potentially. Now we have a product like the Bitcoin mortgage, which we can get into later, but people can essentially use their wealth to essentially diversify their asset base and improve their quality of life. And so that is the baseline of our clients. These are predominant long term Bitcoiners that are here trying to manage their wealth. Increasingly, and as you know from being here for many cycles, Bitcoin and other crypto assets, get these sort of waves of retail interest that comes in whenever there is, say, a housing cycle, or somebody like Elon Musk buys Bitcoin, etc., that you get these sort of waves of interest that are people that are looking to build their wealth with Bitcoin. They don’t necessarily have built their wealth just yet, but they’re trying to get in and DCA over time and slowly kind of build that pie so that they can take a loan. So I think there’s a mix of both. There’s a mix of active Bitcoin businesses and Bitcoin contractors—people that get paid in Bitcoin. Those are our everyday clients, they’ve been with the platform for a long time. They continue to use us to finance a lot of their needs, but we also have this steady base of people that want to build with Bitcoin wealth, that are slowly essentially trying to do that on the platform. And we have products for both. The savings account would be a product for somebody that doesn’t need a loan, but wants to earn more interest over time and earn more Bitcoin. We pay Bitcoin interest on Bitcoin, and so it gives you that. And on the loan side, this is somebody that has already built up wealth, they have a potential capital gains built up on their Bitcoin, and they’re better off taking out a loan than selling some.

Stephan Livera:

Of course. And so then they have to also think about the risks as well. And they probably in their minds are thinking primarily about aspects of custody and aspects around getting liquidated. So I guess they’re probably the main things that people have to consider when it comes to using these kinds of products. And so what are some of the main ways that you see people managing those risks or at least mitigating those risks?

Mauricio Di Bartolomeo:

So on the assets and on the custody side, we’re very transparent with: we are a custodial service. So in order to provide our services, we need to have the keys to the Bitcoin that’s being placed as collateral. And obviously for our—I was a Bitcoiner before we started lending Bitcoin. So we understand the importance of holding keys, and we understand the trade-offs and the importance of that from a practical level and from a philosophical level, right? There’s two things there for the Bitcoin community. And we’ve always wanted to stay true to the Don’t trust, verify ethos. And so to give some of that comfort to our clients, we were the first lenders to do proof of reserves attestations on an ongoing basis. And so that is one of the things that we do to provide some comfort and some assurances to our clients on the loan side, that we are doing what we say we’re doing. And what that means is we have an accounting group that comes in every six months. They look at our assets, they look at our liabilities, and they say, Our assets surpass our liabilities. And every single client gets an anonymized hashed ID that they can then verify on the accountant’s website that we in fact gave the account their correct balance at that time. Because the only way that this exercise can be broken is that we lie, or we misrepresent our liabilities to their group, and then it looks great. But by giving our clients the ability to check that in fact, we did give the accountant the right balance, it basically crowdfunds the liability side of the equation, right? And we expose ourselves so that people can verify that we in fact are doing what we say we’re doing. Other things that we do on that side is we work with qualified custody. So our custodian is BitGo out of the US. They have an insurance policy on their cold facility. And we are obviously in conversations with our regulators here in Canada to essentially be fully regulated as a lending company. And I think that’s where we want to continue evolving in terms of transparency, to give that comfort and that transparency to our clients. And so that’s on the custodial side. And on the liquidation side—so on the liquidation price risk, this is something that we are very, very upfront and transparent to our clients with. The last thing we want is for anybody’s loan to require additional collateral and then that person not able to respond and we end up having to close that loan. So what we suggest to our clients when they are entering into these loans is that they should always take into account that there might be additional collateral required when we experience drops like the ones we’re experiencing in the last few weeks. And so whenever they are thinking about using their Bitcoin to access cash, they not only need to think about that initial Bitcoin, they need to think, risk-wise, six months, one year down the line. If this is the horizons where you want to keep this money, you should have enough of a cushion on Bitcoin to withstand these 30%-40% drawdowns that we have seen from time to time in Bitcoin. So what we do to sort of try to get ahead of that is we try to be very upfront before they get the loan. During the loan, we continuously produce and proactively send out content on how you keep your loan healthy—how to top it up. Whenever a market drops 5%-10%, you’ll see us tweeting, Check your loans, Check your loans. And our system actually sends courtesy e-mails to clients once their LTVs reach 70% and 75% before that 80% threshold. So unfortunately we can’t control how fast Bitcoin moves, right? And our risk and our liquidation thresholds are based on price more so than on time. They’re not based on time because we can’t predict how long Bitcoin’s going to take to go from one level to the other. We also can predict once it’s here how quickly it’s going to go back. So our job as risk managers is to have to execute on those sales when those thresholds are breached. And so the best thing for our clients is to proactively maintain those thresholds and don’t let them get there.

Stephan Livera:

Yeah. And I’d love to talk about some of the various levels and what kind of collateralization you normally go with for customers. And then let’s chat a little bit about the home loan product. But first, if you could just talk through just on the standard loan, what’s the default or the recommended collateral level? And then what’s like the normal, I guess, margin call levels?

Mauricio Di Bartolomeo:

Yeah. So we issue our loans at 50% loan to value to start. So if you come to us with $10,000 of Bitcoin, you could borrow $5,000 equivalent, and you place that under collateral. So your loans always start out at 50% loan to value. You get 50% of what you place in collateral. The courtesy emails to send additional collateral get sent at 70% LTV. So that equates to about a 29% drop from the price in which you took the loan. And then we give a second courtesy warning at 75% LTV so that you understand that it’s now getting worse, essentially. And then our system has to do an automated sale if and when the LTV reaches 80%. And that’s essentially—those are the main thresholds to keep in mind if you’re considering borrowing with your Bitcoin. And obviously the main one—if you have to remember just one of them—is: do not let your LTV get to 80%. That’s your main one that you should be your north star I guess, in terms of when your loan has to get closed.

Stephan Livera:

And so I think those are probably the points where people have seen, I guess, comparable products out there. And my sponsor is Unchained Capital who also have a competing product on that. But I think the new one that is out there now is the home loan product. So let’s talk a little bit about this. Where did the demand for this come from?

Mauricio Di Bartolomeo:

So at Ledn we’ve always been building, or we try to build for, what our clients want. Of course, that sounds simple. I think that’s what every business wants to do. But we work very closely with our clients and we try to listen. So what we started seeing midway through last year, maybe even earlier actually, but what we started seeing last year was many of our clients were coming to us to take out very large loans to buy real estate. And they were saying, Hey, I want to buy this house. I hate my bank. For whatever reason, I can’t qualify for the mortgage for the house that I want. I have X, you know, thousands or millions of dollars worth of Bitcoin. And I just want my dream home, and I’m going to take a Bitcoin backed loan and I’m going buy this property. And I would really, really love if I could make the property part of the loan. So that would minimize the amount of Bitcoin that I have to put as collateral for this loan. And we saw that, and one request came through. Two requests came through. The third request came through. And so we started saying, Okay, there’s an opportunity here. Can we start working with some of these clients to structure a product that would enable us to do this? And so as we thought more and more about the product, we said, Okay, well, this actually is a great product for many reasons. One, it allows us to make the collateral pool way more stable in terms of the volatility and price of that collateral pool. And then the second one is that it allows clients to obviously post less Bitcoin as collateral, to diversify it to another wealth building asset, which has great wealth-building attributes. And by making the collateral pool more stable, we can be more generous in terms of the margin call timing and the thresholds and the processes because half of the collateral is this very massive stable pool that has shown to grow over time. And so when we started thinking of the product as a package, we realized that it had a lot of great attributes and benefits that went above and beyond our existing product. And then we quietly started working with a few of our beta clients to bring this product to market. They started getting some interest from their friends, and then the interest just started snowballing, even though we weren’t really actively promoting this. And then we clued into the fact that there was a great deal of interest for this type of product. And so we made a concerted effort to structure the deal and to make it a reality. We announced the product two weeks ago or three weeks ago, mid to late December. And we’re scheduled to essentially close the first deals in Canada this quarter. And the plan is to bring the product into the rest of Canada and into the US throughout 2022.

Stephan Livera:

And so what structure are we looking at here in terms of valuation? So as you said before, in the standard loan case its 50%. What does it look like in the home loan or mortgage case?

Mauricio Di Bartolomeo:

So in the home loan and mortgage case, the LTV, the total loan to value of the loan is the same. It’s 50% loan to value. The collateral is made up of 50% Bitcoin and 50% real estate. And so to give you a clear example, if you have a million dollars worth of Bitcoin and a million dollar home, you can get a million dollars worth of a loan, essentially. And the product is designed primarily for people that either already own the property and the Bitcoin and don’t have a lien on either—like they don’t have a loan on either the Bitcoin or the house—and they just want to essentially take out this loan to either diversify into a new property, which we’ve heard people that want to do this, because they already own a property fully and clear of liens and Bitcoin that’s free and clear. And so they want to take some of that liquidity and purchase another property. And then there’s also the case for clients that, say, have a million dollars worth of Bitcoin and want buy a million dollar house. And so in this case the process is a little bit different because it’s a new property and it’s a new closing, but essentially V1 of the product is designed for people in this situation. And one more thing I wanted to add is that what we want to do with Ledn is help people buy houses at the most efficient cost of capital relative to their financial situation, right? If a person—and just to be very transparent, we are a Bitcoin backed lending company, and we are getting into financing home loans and mortgages—as you and many others in the space know, the cost of capital is very different between the two worlds. The cost of capital to finance the Bitcoin backed loan is very different than the cost of financing real estate, especially in places like the US and Canada, where the governments are heavily involved in keeping those mortgage rates—I don’t wanna say artificially low—but very attractive. And so of course we wouldn’t want to make somebody that could get access to 1% financing have to take one of our loans—like that wouldn’t really make sense for somebody that can get access to that great cost of capital. If you have Bitcoin and you want to leverage some of that for your new property and you qualify for a loan, we will work with you if you want to do a down payment on the house through a Bitcoin backed loan, and we will help you through our mortgage brokerage partners to get a traditional mortgage, so the combined cost of capital for your property purchase is as low as possible. But our goal here is essentially to assist you in purchasing that home, using the tools that are right for you, or you would choose, and obviously minimizing the amount of Bitcoin you have to put at risk at any time, and optimizing your cost of capital. That’s really what we want here.

Stephan Livera:

And so structured in this way, instead of that person having to, let’s say, put up $2 million worth of Bitcoin in order to buy a $1 million home, in this case it’s $1 million of Bitcoin that they already have, and they’re borrowing the money to purchase the $1 million home. And so that’s an important difference. And so I guess while we are here, could you just comment on that difference that you see between the interest rates? So obviously the let’s call it the fiat home loan rate, and then let’s say the standard Ledn rate. And then let’s say what’s the rate for the Ledn mortgage rate? What kind of rates are we talking about here?

Mauricio Di Bartolomeo:

Yeah, so it’ll be pretty much in the middle. So the Ledn home loan rate will be pretty much in the middle of our Bitcoin backed loans and the Fed traditional mortgage rate—probably closer to the Bitcoin backed loan rate to start, and increasingly move closer to the Fed’s rate as the product progresses and matures, right? Because the same way we did with Bitcoin backed loans, when these loans got out of the gate, you can look around and look at the historical rates that people were charging for these loans, but they were up at the 18%-20% range when Bitcoin backed loans first came out in the market. We know this because we priced them at that three years ago, two years ago, and that was market. And right now, those rates are at 9.5% and 2%. And so they’ve come down dramatically over the last two years. And I think that’s trend will continue as you continue to see lenders like ourselves and Unchained and others that are having great track records—0% loan losses—and we still offer very attractive dollar yields to the people providing the capital. And so I think what you’ll see as we get bigger and better is that that our cost of capital will get bid down. I don’t necessarily think that we’ll converge with the Fed rates. Just for reference: people think about the mortgage rate in the US as this free floating rate. And it’s not really that market-driven. Like, I just want to point out that the Fed has been adding $40 billion and purchasing $40 billion worth of mortgage-backed securities over the last like more than six months. And so they’ve been deliberately doing that to keep those mortgage rates suppressed and to keep the real estate market active. And so as big and as important as the treasury markets is, there’s a lot of noise in those markets from [their] own central banks that have an optical mandate almost to keep the curve looking a certain way.

Stephan Livera:

It’s correct to point that out that we have central banks all around the world acting as lender of loss resort. We have legal tender laws. We have capital gains tax laws—all of these impositions into the market. And in the case of the US, obviously the existence of Freddie Mac and Fannie Mae that also help subsidize these home loan rates. So arguably it is quite true to say that these loans are fiat-artificially subsidized in a way. And so it remains to be seen where exactly that goes, but I think it is totally fair to point out that over time, as the market matures, and as the understanding around Bitcoin grows, more and more people start to see what you and I and many Bitcoin people are saying. So as we speak today, that interest rate for a standard Bitcoin loan is something around 9%-10%, is it?

Mauricio Di Bartolomeo:

Yeah. 9.5%, And 2% admin, 9.5% interest rate. And you only pay interest for the days you have the loan open.

Stephan Livera:

I see. Yeah. And so the hope then is that competition and more players entering the market to provide that fiat funding side will then bring that rate down over time. And so this might end up being a way that Bitcoiners can access cheaper cost of capital than they otherwise would be able to. And I think that’s probably the important point. And I think that brings me to the next question as well, because if a person wants to take a standard fiat loan—just go to the bank and get a normal home loan or car loan or things like that—they will assess you in terms of things like serviceability. They’ll ask you: Stephan, what is your income? And based on your income, you’re allowed to borrow this much. How much of that is going to come into play in Ledn’s products? And I guess one other point is: do you see that as being an opportunity there where maybe you would say, if we do more serviceability assessment, we can maybe give you better terms or a better rate, or do you see that more like, No, part of the reason we do this is for less friction. How do you see that?

Mauricio Di Bartolomeo:

That’s a really great—I think you hit the nail on the head Stephan, which is that it’s always a trade-off, right? Like the more diligence a lender can do on the borrower in terms of serviceability, in terms of how long you’ve been on your job, in terms of when was the last time you got a raise, how do I know that this is somebody—so you know, if you get into the weeds of a bank application, that is what they make you go through. They make you check your tax statements, they make you check your pay stubs. They make you check your letter of employments. All sorts of things. Personal references, just so that they can get comfort that you’re going to be able to service this debt, right? In the case of Ledn, what we’re trying to do is: we understand that if a client is considering a Ledn loan, they’ve probably exhausted some of those options in terms of trying to get that very low cost of capital. And for whatever reason, right? Like people fall off the bank rails for the silliest reasons. Like if you have a personal company, you’re going to have a really hard time. If you’re a contractor, if you’re a freelancer, you’re going to have a really hard time showing the bank a history of employment and a history of this. If you have your own small business—if you have a Bitcoin business where your revenue is in Bitcoin—like there are many reasons why people do not get approved by a bank. And many times, in our view, they’re just looking at it in the wrong way. They don’t even consider Bitcoin an asset for God’s sake. And so we are trying to take a different approach in that what we want to make sure is that your Bitcoin wealth can service that part of the loan. If we can get comfort and we can get enough of your Bitcoin wealth and enough of that collateral to give us comfort that we can extend you to your term on this loan, then of course that’s the value prop of our product, is that we give you access to that property by looking at your profile and your wealth in a different way than a bank would, right? The closer we get into looking at your servicing capacity and diligencing you more and more, the more it becomes like a bank, right? And so the harder it becomes first to compete as we get closer into this realm. So at the beginning, we want to start catering specifically to the Bitcoiners. And like I said earlier, if we believe, or if you believe as a borrower, that you can get a lower cost of capital through a traditional bank, and you just want to use us to finance a down payment of the house, we’ll help you look at that option. Because what we want is for you to be a happy buyer and for you to come back next time. We’re not going to try to push you into a product that may not make sense for you, because what we want is for you to be with us in the long term. I went off a tangent. I’m not sure if that answers your questions.

Stephan Livera:

No, well, essentially I was asking about how you and the company see that trade-off balance. And I think you essentially have answered it around as I would summarize then—and you tell me if I’m summarizing this wrong—is that essentially you are remembering that this is meant to be a company that speaks Bitcoin natively and therefore understands that aspect of it, that there may be customers who do not have income that fits the typical profile that a fiat bank would be giving credit on and serviceability and all of those aspects. So I think that part of the trade-off may mean you pay a slightly higher interest rate, but you get maybe more accessibility, let’s say. That more customers can come and use you, as an example. And so actually, I’m curious then as well, maybe taking that slightly one step further is: how does it work then if there’s a customer who has literally no income? Can that customer still take out a loan? Borrow against it? And then in that case, what’s the presumption that they are going to make interest payments? Or is the presumption that they could continually borrow and roll over? Like, how are you seeing that?

Mauricio Di Bartolomeo:

Yeah. So what we are going to assess—the V1 of the product—what it’s assessing, is the Bitcoiner’s Bitcoin wealth relative to the property they want to purchase. And we will do our diligence to get comfort that the person has enough Bitcoin wealth to essentially satisfy an additional top off requirement, et cetera, if need be. Obviously we don’t want to get into a situation where—for us, closing a loan is the worst thing that can happen both for us and for the client, because it’s a terrible experience. Both the client and us are investing a tremendous amount of time and capital to make this happen, and nobody wants to have a poor experience. So what we’re really trying to do is protect both of us and making sure that we can come out of the other side happy and continue doing business together. So you could potentially have circumstantially no income at this time, but if you have a hundred million dollars worth of Bitcoin and you can give us comfort that that’s going to be available to meet a top up and you want to buy a $5 million house, then we can structure a way with you that we can get comfortable, right? Like, it’ll be somewhat case-specific when it comes to that. But the idea here is for us to use your Bitcoin wealth as a means to assess the property you want to purchase. And the loan is structured in such ways that when clients are engaging in us through this conversation, it’ll become evident as more people get to see the specific details of the loan. But that that’s really the intent, is to say, We want to help Bitcoiners access property and improve the value prop by requiring this Bitcoin, by giving you more time to top up, by allowing you to use your Bitcoin wealth. And that has benefits over the standard Bitcoin backed loan. That’s kind of the idea. It won’t replace the traditional mortgage if you can get it. It’s basically in the middle.

New Speaker:

What kind of loan term are we talking about here? Because in the fiat world, people are typically doing—it could be 20, 25 years of a loan term. How does it work in the Ledn mortgage case?

Mauricio Di Bartolomeo:

So the Ledn mortgage case is just a two-year term in this case right now. It’s an interest-only product. So right now, in the current version of the product, like this may change, but the one that we’re basically working on now, there is no amortization period. It’s really just an interest-only loan that is basically getting you to purchase the property and getting you in the property. We do expect, as this product evolves—and the interest that we have received for this product has been astronomical. Like, it has surpassed our own expectations. So we feel very confidently that this product is going to continue to grow and evolve. And like I was saying to you now, right now it’s a two year term, interest-only, there’s no amortization. The idea is for you as a Bitcoiner to get into the house of your dreams. And obviously as we iterate on the product, we want to extend the time horizons, allow people an amortization schedule, and hopefully continuously improving on the product. But transparently—in Bitcoin terms—two years in Bitcoin is like a 30-year bond in the traditional world. And so as we move from these Bitcoin financing cost of capital and custom of capital—because Bitcoin is used to turning around in three months, six months, a year, tops—now we’re getting into like two-year terms. So this is all part of an exercise of basically maturing Bitcoin’s time horizon, and almost like pushing out the lender’s time preference on Bitcoin, and getting more comfortable with financing Bitcoin over a longer period.

Stephan Livera:

And so if the loan period is two years, is there going to be a rollover facility? Because presumably if not, that customer is now at the end of that two year term would have to find some other loan if they can’t get a rollover with you, right?

Mauricio Di Bartolomeo:

Yeah. And so on the first few pilot loans, what we have worked with our clients is to let them know that—and obviously these are clients that we are assessing that if we can get to that end, they’ll be able to do this—but essentially I don’t foresee this product winding down, you could call it, at the end of two years. I actually see this product as growing exponentially from here. But we have to plan for the worst and prepare for the best, right? Like if we are prepared for the worst case scenario, then the best takes care of itself. And so what we’re doing for the first pilot cases is ensuring that at the end of this two year term, these few people that are entering into these loans would have the means to turn that loan into a standard Bitcoin backed loan at the end of the two-year term. So basically just enough Bitcoin to make up for the house portion so that the loan can be rolled over. And this is in the unlikely scenario that the Bitcoin mortgage would for some reason not be able to be renewed. So that’s the way we’re looking at that. Like I said, I think that hopefully how I would like this to continue is that clients take out the loan, the loan continues to grow, we receive interest from investors that continue to fund us, which bids down the cost of capital. And then at the time of renewal, the client can take out a better interest rate with a longer period, and amortize it and gradually over time as they renew and terms get better, the client can take the benefit of all of that.

Stephan Livera:

And when it comes to margin calls. So we spoke about the process in the standard Bitcoin loan process. What does that look like in the property case? And does that imply—obviously we all know it’s easy to see the price of Bitcoin and obviously it’s quite volatile. What about in the case of the property market? Does that require regular valuation of the property to sort of say, Oh okay, look, the property price has gone up or down, or how does that come into it?

Mauricio Di Bartolomeo:

Yeah. So this is a really good point because I think this is one of the biggest differentiators of this product. So obviously to get comfort on the value of the property, we have to do an assessment, like a property assessment at the start of the loan. And that will be at the cost of the borrower at the time of the application. Ledn will also hold the right to reassess the property at the one year mark, just to ensure that the property value has been maintained. And when it comes to the Bitcoin piece, I think one of the most interesting things in this product is that when the top up for Bitcoin is required in the case of the home loan, we’re actually able to allow the client two weeks, essentially, to top up that additional amount. And in that sense, it is a time threshold. Versus, in our standard Bitcoin backed loans, it’s not a time threshold, it’s a price threshold. So from 70% to 80%, as we all know, unfortunately it can happen in a matter of hours, getting from 70% LTV to 80% LTV in a traditional Bitcoin backed loan. Now in the case of the property loan, once the Bitcoin price drops such that the top up is required, we’re still able to give you two weeks to come up with that difference. And the reason for that is that we have this other massive pool of collateral in that loan that has not dropped in price as dramatically—typically—as Bitcoin does. And that gives us that flexibility to pass through some of that extra time to the client.

Mauricio Di Bartolomeo:

So that’s I think one of the biggest differences in terms of a—because anybody that’s borrowed against their Bitcoin probably has gone through some of these moments where you need to send more Bitcoin and you were either out of your house or they caught you at an inconvenient time. A lot of our borrowers have actually moved to the proactive approach. So they will overcollateralize a lot of their loans if they’re traveling or if they’re going to be away. And so that behavior actually is impressive how smarter borrowers get, and how less and less of them are impacted when you have these.

Stephan Livera:

Yeah. And I think it’s an interesting point because this product tends to work best for people who have already been around in Bitcoin for a while and have therefore accumulated call it hundreds of thousands, or even a million plus dollars worth of Bitcoin. And so they need to have that survival mindset to have made it that far. And so potentially that is there. But of course it’s always possible that people overextend and maybe borrow above their head and beyond what is a conservative and prudent amount, so that’s always a tough conversation and something people have to really consider for themselves. But all things said and done, it could save people a lot of money in terms of what they would otherwise pay in terms of capital gains taxes. And they might rationally think, Well, I would rather take out a loan and I would rather pay interest than pay this capital gain. And I would rather retain my exposure to Bitcoin because obviously over time, number goes up. And so I want to retain my exposure to Bitcoin and use fiat loans as much as possible—could be the thinking, so long as they can do it prudently.

Mauricio Di Bartolomeo:

I think you’ve nailed it on the head. Like that’s essentially been our approach or our thesis, I guess, from the early days, is that as Bitcoin continues to grow and become this reserve asset and people continue to use it as a tool to build wealth, it just makes sense. If you look at the behavior of how wealthy individuals have perpetuated their wealth over decades in Europe and North America, it’s typically borrowing against their assets. They don’t sell their assets, because their assets get inflated away whenever fiat units get printed, right? So since the fiat system has been in existence, there’s been this boon in asset backed lending. And it’s largely because it’s a product that people understand—assets rise up with inflation. It’s like when the tide is going up, at least your boat is floating higher up and you’re not losing that purchasing power. And so our view was that the same way people in North America and Europe have used properties to borrow against them and take out these massive 5X shorts on the dollar using their houses because that’s what a mortgage is. Like you can think of a mortgage as you’re borrowing dollars to be long property. But I look at a mortgage as you’re shorting dollars to the tune of 5X and you are in a position that is anchored by a property. And over time, your dollar short does great and you double up on it, which is called the refinance refinancing of the property. Like you built up equity, you take more and you short even more dollars. In some ways what we are doing even in the standard Bitcoin backed loan product is a mortgage for your Bitcoin. We’re giving you a loan and you’re not having to sell your Bitcoin, and you still keep upside on that Bitcoin. So the thought of this was that if we can underwrite dollar loans for people that have Bitcoin all over the world, we could help them perpetuate some of their wealth in the same way that home mortgages have helped North Americans and Europeans perpetuate their wealth, build their wealth over time.

Stephan Livera:

It’s also quite common that people use similar the kinds of products, but against their equities portfolio. So they’re borrowing against that. And so this is essentially taking that into the Bitcoin world, and you can think of it like it helps HODLers HODL, however there are some important caveats there: obviously there’s a custodial trade-off. There is a liquidation risk. But so long as the HODLer is comfortable with that, they may enter into this scheme or plan and end out ahead in Bitcoin terms—I guess that’s the ideal case. So I wanted to switch up a bit and talk a little bit about stablecoins. Now, obviously, most of us are hardcore Bitcoin-only, believe the world is going to a Bitcoin standard and so on. But it’s seems to me that whenever I talk to people, especially from Latin America, they often mention how popular stablecoins are and in their view how essential it is. And I know obviously coming from Venezuela, you will obviously have some insight into this. I wonder what you can share there. How essential, how necessary are stablecoins? Do you see them as a bridging thing? Or how do you view them?

Mauricio Di Bartolomeo:

Yeah, I think stablecoins are incredibly important. And I guess it’s hard for someone like myself or other people in LATAM—whenever we try to come communicate the impact of them to somebody that hasn’t lived in these markets, it becomes a bit challenging because a bit of it is having experienced it. So maybe just to draw a few analogies that other people can potentially draw on: if you’ve ever tried to buy anything, like if you go to alibaba.com right now, what are goods priced in? Dollars. They’re not priced in renminbis. They’re not priced in your local currency, they’re priced in dollars. If you try to order anything from any supplier in any part of the world, chances are you’re going to get an invoice in dollars, and it’s going to give you a dollar number and bank account information that you need to make a payment with. In many places—and the reason they’re set up that way—is because the buyer, the marginal buyer most often comes from the US, or comes from a market or a place where you can pay in US dollars. But there are very real cases, like the cases of Venezuela, Turkey, Argentina, Nigeria, you name it, that the government actually makes it impossible for you to buy dollars. Or for whatever reason—if they don’t let you hold a dollar bank account locally. If they do, it’s a scary draconian surveilled bank account that nobody wants to touch. Most people have had their savings in their local banks wiped from existence. So even if you did get comfortable with your government, you still think there’s too much risk in having your dollars sit in a local bank. What stablecoin gives you is this self-custodial way of digitally holding your dollars. And not only that, until stablecoins—and this is something that some people don’t think about it this way—but until stablecoins, it was very difficult for somebody in Mexico to send dollars to somebody in Columbia. It was very, very difficult. Very difficult. You’d have to convert your pesos to dollars and your dollars convert it to bolivares. And you would have to pay X percentage to this person and X percent to that person. And the worst part is they just wanted dollars. They didn’t even want to go through their conflicted, complicated rails, but their governments forced them to. And it makes it artificially difficult, right? And so in a place like Venezuela right now, where people have decided not to use the bolivar anymore, Venezuela is a fully dollarized economy. Like,most businesses in Venezuela will accept dollars or bolivar payment. And so to me, stablecoins are hugely important because they’ve allowed essentially dollar banking to the emerging world. Listen—and the other piece that I wanted to say is that for you and I, Stephan—Bitcoin is not scary. We’ve been in this for years. We understand it. We look at the volatility and we rejoice in it. Like, for a person that is just coming into Bitcoin, and they have very limited wealth to protect, 10%-20% volatility can be daunting. But when they see that they can now all of a sudden hold these dollars similar to a bank account, transfer them, sending and receiving them, access interest accounts, earn interest, and they’re getting treated way better than their local banks, and they’re just being able to do way more for cheaper—they will themselves go into the next stage. So like they will themselves say, Okay, what else can I buy in this ecosystem? Where else can I invest? And I think in many ways the stablecoins are a bit of gateway drugs to Bitcoin. And part of me does feel like there will be hyperdollarization before there is hyperbitcoinization in many ways, because if you look at when the domino falls, when a local currency fails, what usually makes up for it is dollars—the economy becomes dollarized. It doesn’t really become Bitcoinized. So I see that for example, Turkey fell—dollar economy. Venezuela fell—dollar economy. Every so often economies have fallen and never been able to revert themselves. So like Panama, for example—dollar economy. Peru has like a fully legal dollar/sol system. Ecuador trades at a one to one pair. So a lot of them have slowly—El Salvador, perfect example. And so the dollar is the reserve asset, and rightfully people prefer the reserve currency. So I think it’ll be the place that people will go first before they go to Bitcoin as the currency fails.

Stephan Livera:

Now, one criticism that I can hear some listeners saying is—and maybe some of this is coming from almost association, right? So it’s like, Oh, some of these stablecoins are started by shitcoiners. Or they are operating on shitcoin rails, as an example. Or the other criticism I might have heard from talking to people is, Oh, look, some of these people, they just want to do trading, leverage trading—that’s why they want all the stablecoins. If they just held Bitcoin, they’d be better off, right? And I’m not saying I agree with those points of view. I’m just obviously just sort of putting them out there because I think that’s what some people might be thinking. What would you say to those kinds of ideas?

Mauricio Di Bartolomeo:

So my experience has been very different because I’ve lived through the stablecoin demand on my clients’ side. I experienced this from our clients. And let me give you a couple of cool stories—not cool, actually, but a couple of stories that highlight how important stablecoins are. When we started dispersing loans into Latin America—which is where most of our loan clients still are today, and we are very active in that part of the world—in a place like Colombia, for example, when you receive dollars into your bank account or any type of transfer into your bank account, the bank treats you as guilty until proven innocent. And what that means is they will treat that wire in as income, and they will withhold it and they will want you to essentially show them that it’s not income. These were loans that we were transferring to our clients. And what ended up happening is that many times we would have to send them the loan agreements because they would have to set up these meetings with people in their banks and they would have to show and verify that these were in fact loans so that they could get the money released. And it became this very burdensome process for them to access wealth that was rightfully theirs. And so some of these clients, after several times of this happening, they were like, Guys, I just don’t want to put up with this anymore. Can you please send me the funds in stablecoins? I can get everything done here locally with stablecoins, and I just don’t want to go through my bank anymore. I just don’t want to deal with it. And so we said, Okay, that makes tremendous sense why you would want that. Then we started getting clients in Venezuela and other parts of the world where they were saying, I can’t have a local dollar account. I don’t have a local dollar account. I don’t want to get this into my local currency—it’s going crazy. Please just send it to me in stablecoins. Like, send it to me in stablecoins—I’ll figure out a way to spend them and it’s just as good for me, essentially. And so this came on again and again and again and again, and today we’ll still see actually a greater and greater deal of our loans—more and more of them become dispersed in stablecoins rather than in fiat because it’s instant settlement. A stablecoin transaction gets sent and received within minutes. You don’t have to wait through the three days or four days or God forbid a weekend in the traditional banking system. It’s five days that you don’t have your money. And not to mention the fact that if you look at it from a remittance standpoint, the fact that stablecoins can run on digital infrastructure are a huge step up for banks. Because the other thing that people don’t realize is that in many of these countries, there aren’t remote branches for these banks. And many of these banks don’t have the ability for you to onboard digitally to open an account. And so stablecoins are also helping a lot of people on the fringes that are lucky enough to have somebody that teaches them about the technology, but they don’t necessarily live near a bank or near a big city. But they can still kind of be connected to the system by being connected to the Internet.

Stephan Livera:

Any thoughts on where stablecoins are going regulation-wise? And one example that I’m thinking of is that typically stablecoins have KYC (know your customer) on the entry and exit points, arguably, but perhaps on those intermediary steps, it’s not really. And then that’s part of where the frictionless nature of them comes. Do you see a change to that coming from say US government regulation or any other kind of government regulation?

Mauricio Di Bartolomeo:

Yeah, I think that’s going to change. I don’t know necessarily, to your point, the mechanics of the KYC checkpoints—where those will land. But what I do think will happen is stablecoins will get regulated. In fact, I wrote some like 2022 predictions as I was ending the year. And I think one of the ones I wrote was there will be regulation for stablecoins. They will either get regulated as banks or partner with banks, in my view, to keep their offerings compliant. I think Lyn Alden made a fascinating point not too long ago, which is that the United States is very incentivized for stablecoins to do well, because it’s a way to monetize treasuries, right? Like, a stablecoin treasury facility. If the United States can say stablecoins can only hold cash and cash-equivalents and those cash-equivalents are treasuries, well all of a sudden you have God knows how many billion dollars worth of asset pools that are now having to go to treasuries. And they are desperately looking for marginal buyers in treasuries. So I do think that it makes a lot a sense that there will be perhaps reserve requirements on these stablecoins, because I think that’s what freaked them out—is the fact that they all claim to be dollar-backed, but they don’t know that they are in fact all dollar-backed. And so if the United States Treasury or whatever regulator ends up overseeing them can put their hand over their hearts and say, I can oversee those accounts. These people have an account at the Fed. I see what they have. I see the liabilities. I can get comfortable with these operators. Then I don’t see a reason why they shouldn’t continue to flourish. Mind you, you might see a bit of a bifurcation between regulated stablecoins and unregulated stablecoins. And some might be used for different use cases, right? Like perhaps it’ll be difficult to start seeing the regulated stablecoins interact with DeFi and some of these anonymous protocols in DeFi, and you’ll start seeing the unregulated stablecoins be used for more of that flavor, and the regulated ones to be more bank settlement information. Like when you have to pay your Visa with a stablecoin, it’ll be a regulated coin. That kind of stuff.

Stephan Livera:

Essentially summarizing then, you believe regulation is coming, but it might actually be positive for stablecoins and in some weird way positive for the US government. Because think about it from this point of view: everyone wants more bag holders, right? If I’m printing money and I’ve got lots of bag holders of my coin, that’s good for me. So if I’m the US government or I’m a beneficiary from that system, I want more people to be bag holding my treasuries. And so you can sort of see there’s an incentive there that if you are in the US government or you are thinking from an American exceptionalism point of view, you might be thinking, Yeah, that’s great. Let’s have lots of people around the world hold our government’s bags—in terms of debt.

Mauricio Di Bartolomeo:

And it disperses inflation. Like it takes away some of that.

Stephan Livera:

Yeah, like not to excuse it, but just to look at—this is what the incentive of the system is, right? Obviously I’m anti-fiat money, anti-central banking, all of that, but I’m just kind of thinking out what do the players in this game want? What do they want? So one another question I’ve got for you, and I don’t know how closely you follow this space. Do you have any thoughts on where stablecoins are going technologically? So as an example, there are ideas like this idea of a DLC stablecoin or a stable channel it might be called, or I know there are other projects. I think one in LATAM, I think it’s called Money On Chain and others like that, that are trying to achieve it in a more technological fashion. Do you have any thoughts on that?

Mauricio Di Bartolomeo:

Yeah I think my thoughts on stablecoins, especially around tech and all this stuff is, that ease of use and simplicity will win, especially on stablecoins, because look at how difficult it is to get people to run their nodes on Bitcoin, right? Like, it’s very difficult. Most people just want to be tourists of the service, right? Like they don’t want to be the contributors of the service and maintain the integrity of the network. Most people just want to be clients. They just want to be able to use it and not have to worry about the backend and how that stuff works. I think this will be even more so true for stablecoins, because in stablecoins what people are really using them is for the one that has the most convenience, the one that has the most ease of use, the widest distribution network, and the one that people can get comfortable around, I think that’s the one that’s going to win. Because at this point, I think it’ll come down to accessibility and simplicity, because the people using—you can sort of expect somebody that wants to get into Bitcoin to understand it, and be a little more technically inclined. But stablecoin users are going to be everyone, right? Like anyone and everyone, and you’re going to have to make this app tool, whatever it is that you’re going to viralize the use case of stablecoins, it has to be very simple to use for the layman. Like, it has to be a very simple wallet or a very simple interface. I don’t know that it’ll be through a coin itself. I think it’ll be more of a centralized entity perhaps or an app or something that viralizes it, just because at a protocol level, it’ll be very hard for the marginal user to interact on a particular protocol or not. It’ll probably be driven by somebody making a really, really sleek, easy to use app, and then abstracting out the backend and that app kind of gaining popularity. I think that that’s how I would see it. I don’t necessarily see a world where someone in LATAM is choosing to receive a stablecoin over the other because of fees or something. I think there will be one big winner in the stablecoins. That’s kind of how I see it.

Stephan Livera:

So essentially in your view, it’s like convenience will rump all in the stablecoin technology game, let’s say. Now one other area I wanted to ask you about—and actually in your fairness, you did point out about the proof of reserves and the idea of having regular audits—but around the ecosystem just broadly and this idea of going fractional, right? And so historically, everyone knows the story, or most people know of the story of Mt. Gox going fractional. And obviously that was part of that blow up. Do you see further risks in the ecosystem there that potentially, if let’s say years and years down the line, everyone gets onboarded into this sort of custodial platform that they think they’re using Bitcoin, but really they’ve got an IOU. And do you see that as like a potential risk that people all go down this fractional reserve system or pathway?

Mauricio Di Bartolomeo:

Yeah, I think if you look at what’s happened in Bitcoin, and obviously like the Quadrigas of the world and the Mount Goxes of the world, you can very quickly point and say, we need to make sure that this does not happen again. We do that as a community, but I think whose job it is to really do that is of regulators, right? That’s who we have designated as a society to in some ways protect investors from being treated unfairly. And I think if you look at the actions that they have taken recently, they have clued into the fact that these companies are becoming very popular. So lending companies like ourselves and others have grown tremendously in popularity. We’re holding billions and billions of dollars of assets on the platform. And there’s a clear demand for people using these services. And mind you, these are all fully KYC’d people. You know, we are gonna report everything to our tax authorities, et cetera. Like, these aren’t people looking to do anything bad. These are simply people who access services that they are benefitting from. They wouldn’t be using them if they weren’t. So what I think regulators are trying to do, if you look at some of the actions—for example, we have filed a regulation, our application to the Ontario securities commission, which is the Canadian equivalent of the SEC, there’s been action from the SEC and other regulators trying to better understand lending companies on their side of the world. And I think this year you’re going to see a lot of these conversations. And a result from this exercise will be that regulators are going to want anyone that is offering these types of accounts to issue account statements to their clients, to make sure that they have their compliance taken care of, the anti-money laundering procedures taken care of. They’re going to want to see great balance sheets relative to the size of your business. And so I think these are all the—and to your point, you’re going to have to be audited. You’re going to have to have proof of reserves attestations. There will be a series of thresholds and process requirements that are going to be created. And I think that’s part of what you will see in this year. I also think that there’s a good chance—because right now, for example, there’s almost two worlds. There’s the centralized lending and there’s decentralized lending. And in centralized lending, you have to have a compliance officer and all these other things—do KYC—but all of a sudden, if you just do some magic clicks and decentralize your business, then—poof—then you don’t have to know who your counterparty is and you don’t have to do KYC, and you don’t have to have a chief compliance officer—I think that gap is going to get closed, because I think regulators are going to get to DeFi and they’re going to try to better understand it. And I think they’re going to want to see the same things from lending protocols that are decentralized from the ones that are centralized. And I think right now there’s a bit of a thesis that in decentralized finance you can have a decentralized platform but be a centralized entity and have an office in the US and do all these cool things. I think that that thesis might get challenged this year as you see potentially regulators move closer into the space.

Stephan Livera:

It will be fascinating to see what happens. I of course remain anti-regulation myself, but I think it is one of those things where we have to also assess what is the likely outcome, right? I mean want that, but in terms of what are the regulators looking at and what are their are likely to go and focus on and what are their likely actions, I could see that kind of scenario taking place. But I think nevertheless, the broader theme of what we’ve been speaking about today is again Bitcoin finance—taking loans against our Bitcoin instead of spending that Bitcoin, and using loans rather than paying capital gain tax. And so I think those are interesting things for listeners to think about, because you might end up net ahead, taking into account certain risks that are there. So final question for you. Do you have any thoughts for listeners there about how they should think about loans and the fiat system, especially for maybe some listeners who might be thinking, No, I’m anti fiat—like the whole point is just stay in Bitcoin. What would you say to that sort of person?

Mauricio Di Bartolomeo:

I would look at fiat as an instrument, as an economic instrument—as any other instrument. The second you start putting feelings on an instrument that doesn’t have feelings, and it is not really a living being, then it’s hard for you to think clearly, right? And to really assess the value of potentially using or not using that tool for your own benefit. Prior to Bitcoin, you could only finance assets within other assets or other currencies. And I personally did really well shorting the bolivar and long the dollar. So sometimes you just have to think of an asset for its properties and how it can behave in the mechanics of how it works relative to the goal or the—mind you: yes, of course, there’s like a philosophical goal that you might not agree with and others, and that might lead you to act differently, but I would encourage people to look at a dollar as just an instrument that is just part of this whole ecosystem, and that it interacts and interplays with Bitcoin as we all as society try to decide what we want to use as a reserve currency. Because there’s just so many of us out there in the world, I think it’ll be difficult for the entire billions of people to consolidate on one reserve asset. There will probably be more than one dynamic or forces in play as this happens. And so I would encourage people to see if and how they could benefit potentially from using financing with an instrument like a dollar to grow more of their Bitcoin wealth.

Stephan Livera:

Excellent. Well, I’ve enjoyed chatting with you, Mauricio. I think it’s been a very intellectually stimulating conversation for me. So thanks for joining me. And of course, where can people find you online?

Mauricio Di Bartolomeo:

Yeah, definitely. Our website is ledn.io And our social media is @hodlwithledn, and my social media is @cryptonomista.

Stephan Livera:

Fantastic, thanks Mauricio.

Mauricio Di Bartolomeo:

Thank you, Stephan.