Interviewer: Coming to you live right now from Definition at Token 2049 in Singapore. Of course, this is the event where institutions and builders in tokenized credit, yield, and stablecoins meet, and it is powered by Accountable, which is the verification layer bringing institutional finance on chain. Joining me right now is Max Barrais, managing director at Galaxy. Max, welcome to FinTech TV.
Max Barrais: Thanks for having me.
Interviewer: So, uh, first of all, Max, tell us about Galaxy's lending business. What do you offer and who are your clients?
Max Barrais: Yeah, so I'll start with who are our clients. It's really anybody who's got digital assets, and so that spans from high net worth individuals, uh, institutional counterparties, the exchanges, the protocols, the digital asset treasury companies. And if I think about and talk about our different products, it's margin lending. That's sort of our bread and butter. A counterparty will post Bitcoin to us, and they'll borrow on margin dollars or whatever other asset they're looking for. Um, that can also be a pair trade, for example. So they would borrow Bitcoin, sell it short, and then buy something like Ethereum as an example. We do collar loans, so that's a loan with two embedded derivatives. You sell a call, you buy a put. The put serves as sort of the protection layer to the downside. And then in addition to that, we've done some work within the structured finance ecosystem. We've closed down a couple of different CLOs over the course of the last 18 to 24 months. Um, and expanding into some other more unique type of offerings, uh, private credit, looking at the on off-ramp crypto, the cross-border payments, and then in addition to that, really leaning into a lot of things on chain. We recently launched the Galaxy on-chain financing rate, which is our blended rate, which is a weighted average based on where we're borrowing from DeFi, which is a more accurate reflection of our cost of capital.
Interviewer: Right. So from what we're seeing today, institutional crypto credit is growing again. How would you personally describe the market today?
Max Barrais: I think what we're seeing is a maturity in sort of the players that are in the space today. I think 2022, you flushed out a lot of sort of the, um, less mature actors, and so what you're left with is a much more sophisticated group of individuals who are still engaging in the crypto sort of ecosystem around credit.
Interviewer: And in what ways does this market look different from 2022?
Max Barrais: I think 2022, there was a lot of unsecured lending, and it was unsecured lending without much credit underwriting associated with it. And now what you're seeing is just the sophistication of the players that are still left. You're having a lot more in terms of understanding of credit risk associated with people who are in the credit space within crypto. And as a result, you're starting to just see that sort of manifest in higher quality counterparties.
Interviewer: And over that time, how did the, uh, type of borrower coming to you change?
Max Barrais: I think it really comes back to sophistication. We're starting to see much more sophisticated players that are still around, and as a result, there is a lot more, um, structuring components that are important. So each borrower profile is different. Some people really care about making sure their collateral is non-rehypothecated because rehypothecation hurt a lot of people early on in 2022. And as a result, I think that that just means that you need to understand the different types of risk factors, reward factors, what's important to a borrower, and that kind of manifests through the conversations that you have with people. And then you just try and find a solution based on sort of their pain points to design a credit product that's important for them.
Interviewer: And what do you think are the most, um, obvious or painful pain points at the moment?
Max Barrais: Rehypothecation or non-rehypothecation, I think that's one of the things that people care a lot about. I think that there's a trade-off when it comes to rehypothecation. You obviously get a much cheaper interest rate, but as a result, you do have credit exposure to whoever your lender is, um. And then in addition to that, I, I, I think just underwriting and understanding the balance sheets of the counterparties that you face, I think that's important to just understand, like, the whole credit profile of sort of the counterparties in the ecosystem.
Interviewer: And how do lenders decide which borrowers actually deserve credit without full collateral?
Max Barrais: Yeah, that's a good question. I think from our standpoint, we don't lend unsecured. That's one of the decisions that we had made from the top down, and as a result of that, we take advantage from a borrowing standpoint where we look to borrow unsecured. Part of that is because we have a very strong, uh, public balance sheet where we have our auditors and KPMG that allow for us to borrow unsecured from some of the players who are doing unsecured lending. And I think for those counterparties out there, and now I'm kind of speaking for them, they look for high-quality counterparties. I think having something like a public company with publicly audited financials makes it feel much safer when they lend directly to Galaxy because they can understand that we have a strong balance sheet. We know that they have independent auditors that come in and verify sort of what we're exposing to the market. So if you think back to 2022, one of the toughest things that happened back then was the fraud around a counterparty who had repped to the fact that they had multiple billions in net equity when it was just not true, and as a result, a lot of people lost money on that specific counterparty, right?
Interviewer: Could better visibility into a borrower's finances actually reduce how much collateral lenders, uh, need to ask for?
Max Barrais: Of course. I think that understanding sort of the net equity of a counterparty in terms of their balance sheet and their financials is super important. It's very different if I'm talking to somebody with net equity of, say, 10 million bucks versus a counterparty that has publicly audited financials and multiple billions behind them. You can get a lot more comfortable with facing them with a lower collateralization requirement as a result of them just having much stronger financials in the event that there's something that kind of goes awry in terms of, like, their ability to top up on margin, right?
Interviewer: And I, I, I wanna kind of get your opinion on this. Do you see institutional credit eventually moving fully on chain?
Max Barrais: Um, I hope so. I, I don't know if we'll ever fully get 100% of credit on chain, but I do think that you're gonna start to see a migration there. TradFi is definitely paying attention to what's going on within the digital asset economy, and I do think that there's some advantages to the blockchain and just sort of blockchain-native rails in terms of enhancing what has already been built within the traditional financial ecosystem.
Interviewer: And if we say over the year ahead, what is your outlook for crypto credit?
Max Barrais: I think the main hot topic that I've been seeing in and around the conference has been vaults, and vaults is a capital formation layer. I know that that is something that Accountable does as well, and it's a really unique way of being able to source capital and then be able to then run your strategies as a result after forming the capital through something like a vault ecosystem.
Interviewer: Mhm. Max, it's been a great pleasure having you on FinTech TV. Thank you so much.
Max Barrais: Thank you for having me. Appreciate it.
Interviewer: Thank you.
