Institutional lending using bitcoin as collateral is a growing space that has faced many challenges, mainly due to collapsing exchanges and associated counterparties. The problem, more often than not, boils down to a single word: rehypothecation.  

Large entities holding bitcoin need access to millions of dollars all while striving to minimize counterparty risk. Until now, the level of counterparty risk they’ve had to accept has been far too great. Institutions had access to liquidity, but they would give up control and visibility of their bitcoin, which could lead to total loss in the event of their lender going bankrupt. We have the recent examples of Genesis, BlockFi, Prime Trust, Fortress Trust, and FTX to point to in this regard. All their borrowers face a loss of bitcoin that could’ve been avoided had the collateral been managed using tools native to bitcoin—tools which Unchained has been offering with all of our products since 2018.

Institutions are now hyper-aware of the imperative of security and control for their bitcoin treasury. Now, using the expertise gained in originating more than half a billion dollars of loans, we are pleased to announce the Unchained institutional lending service, specifically aimed at addressing the core need of institutional lending for loans of $3 million and beyond. Institutions can now access liquidity with bitcoin as collateral with the least amount of counterparty risk possible.

Security of bitcoin collateral through our network of enterprise keys

At Unchained, bitcoin is always controlled by three keys. Our vaults allow clients to control the majority of keys in a quorum, giving them complete control over the movement of their bitcoin and ensuring that it is protected from loss and theft. If something goes wrong, Unchained’s enterprise-grade key can help. Enterprise and private wealth clients can alternatively opt for a multi-institution model, where they control one key or even no keys at all, while still assuring them that their bitcoin is not being rehypothecated or misused by institutions.

With no single points of failure, Unchained’s multi-institution custody model has proven itself time and again to be a robust structure for protection of the most precious part of the lending transaction—the bitcoin collateral. Even if the borrower doesn’t control all the keys, no one entity needs to be fully trusted out of the three that are each controlling a minority of keys to the bitcoin.

We’ve been perfecting the art of securing bitcoin with distributed keys for over 6 years at Unchained. All of the lessons we’ve learned along the way culminate into the best security profile for your bitcoin, whether it’s backing a loan or held in a vault.

Why does Unchained have the lowest counterparty risk? 

Contrary to other models, bitcoin is not lent to Unchained. Rather, it is used to back the loan made to you, the borrower. The bitcoin remains the property of the borrower and is not rehypothecated. This no rehypothecation claim isn’t just a promise; it is impossible for Unchained alone to move bitcoin out of the loan address. An Unchained vault always requires two keys to move the bitcoin, and Unchained only has one. This is a striking difference from other lenders where the terms may indicate the bitcoin is no longer property of the entity upon deposit to the platform, and even if they promise not to rehypothecate the bitcoin, the possibility of them being able to still exists. 

Because of this foundational difference, Unchained simply cannot take risks by lending out bitcoin used as collateral insulating the borrower from any claims on their property aside from the lending transaction between the borrower and Unchained. This is just one of the many reasons why Unchained continues to lend today, and has survived multiple market crashes while competitors have shuttered their doors due to taking tremendous losses from risking customer funds.

Not only is all bitcoin at Unchained controlled by the bitcoin protocol’s native multisig functionality, but it also provides unique security compared to competitor offerings as well. Some lenders will employ different protocols that may accept your bitcoin but don’t leverage the properties that make on-chain bitcoin transactions secure, for example wrapping your bitcoin in another provider’s platform token. No fancy smart contracts means no additional attack vectors when you work with Unchained. 

A better proof of reserves

Rather than provide insight and transparency into the status of the bitcoin collateral, some institutions issue a proof-of-reserves statement to demonstrate the availability of bitcoin to the company should there be a question as to whether they are acting responsibly with borrower funds. While well-intentioned, it does nothing to reassure distinct entities that the borrower’s bitcoin collateral remains available for withdrawal upon payment in full of the loan obligation. Proof of reserves also tells you nothing about a company’s liabilities. 

At Unchained, we believe you should always be able to independently verify the status of your bitcoin collateral by using your key to confirm that the funds shown in your loan’s collateral deposit address(es) are indeed a part of the wallet to which you hold a key. This prevents us from rehypothecating your bitcoin even if we wanted to. This verification can be performed within the Unchained platform or by employing an open-source tool that follows the same standards as Unchained, such as Caravan, Sparrow, or Electrum, in conjunction with the multisig file available to you within your loan account. This cryptographic verification with your key provides indisputable proof that addresses are or aren’t associated with the keys.

Borrow from Unchained

You shouldn’t have to accept security tradeoffs in order to access high volumes of liquidity for your enterprise needs. With Unchained, you don’t have to compromise to get the best of both worlds. 

If your business has a bitcoin treasury worth $7,500,000 or more and you want to unlock liquidity without sacrificing security, we can help. Reach out to us to learn more.

Unchained Capital, Inc. is not a bank. Loans may be originated by Lead Bank and subject to approval. Rates and fees vary by term lengths between 90 and 360 days. All loans have a maximum loan-to-value ratio based on required bitcoin collateral. Fees may be assessed on overdue amounts. A loan application is required. May not be available in all states and may be subject to local restrictions where available. California loans may be made or arranged by Unchained pursuant to a California Financing Law license. To learn more about Unchained’s licensing, see our legal and regulatory page.

Lead Bank is an FDIC insured Missouri state-chartered bank. Lead Bank is an equal opportunity lender.