Though it can't lay claim to being the first to offer cash loans based on the use of cryptocurrency as collateral, Cereal's new blockchain-backed lending model is meant for those purchasing crypto mining equipment — giving it a potential revenue pool that most banks won't even dip their toes in.
Most crypto mining machines are now referred to as Application Specific Integrated Circuits, generating the "blocks" of bitcoin transactions that operate through the distributed ledger, or blockchain technology, for security and transparency.
While there have been various levels of success, failure and scrutiny for all things related to cryptocurrency, Cereal, a startup based in the Cayman Islands, is looking at the aspects of the market that could be considered the most stable. By encouraging more mining activity, Cereal also promotes the viability of the cryptocurrencies being mined.
"The problem now is that traditional financial institutions don't want to provide loans for what they consider to be risky activities," said Sergey Vart, Cereal's CEO. "But our company sees mining, for now and into the foreseeable future, as the backbone of the cryptocurrency efforts."
Cryptocurrency mining typically involves setting up massively powerful PCs to validate transactions on a blockchain. These machines are often comparable to high-end gaming PCs, and range in cost from $500 to $3,000.
"We see this as a huge market, with an estimated $20 billion in assets that can be used as collateral," Vart said. "There are people who really believe in the growth of crypto assets, but there is a lack of lending options available for using those assets."
Cereal, which launched in late 2017, will continue to test the product this summer before offering it to the public later in the year. It plans to focus on Europe and Asia through much of 2019, adding the U.S. in the fourth quarter of 2019.
In-house tests have shown the technology works, Vart said, but the company continues to "fine-tune some legal aspects of the product."
Cryptocurrency investors seeking a cash loan for mining equipment can register with Cereal to start assuring the legalities of their operations and the value of their holdings. The process then begins with a request for a loan. Usually, 50% of the mining hardware purchase is made upfront and Cereal establishes installment payments over a 12-month period to cover the rest.
Cereal protects itself from volatile shifts in cryptocurrency value by recommending to clients to add more collateral if it drops by 20%, or they will seek more in principal payment. If the value of the collateral drops by 40%, Vart says, Cereal will initiate an automatic liquidation of the collateral and sell it at exchange rates to recover principal and any outstanding interest.
"This is a new business model, one we haven't seen in many other products in this sector," Vart added.
In other use cases, Cereal expects borrowers to put up cryptocurrency holdings for cash to pay for any project needs or even to pay living or business expenses that need immediate attention.
While supporters of cryptocurrencies have applauded any instance in which retailers accept these currencies in the same manner as other payments, the alternative payment methods have not triggered significant consumer or merchant adoption.
It's been a different case in the lending business, as companies such as SALT, Sweetbridge, Unchained Capital and others have offered cash loans secured through cryptocurrency assets. Essentially, that business model provides the owner of cryptocurrency the ability to keep that asset in place while paying off the loan.