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First Securitisation of Bitcoin-backed Loans: The Beginning of a New Asset Class

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Vinod Kothari and Simrat Singh | Finserv@vinodkothari.com 

Ledn, a Cayman Islands based bitcoin-backed lender, has originated what is believed to be the first securitisation of bitcoin-backed loans. It is a pool of about $ 199 million bitcoin-backed loans, with a first loss piece of $ 11 million, roughly 6% of the pool.

Rating agency S&P assigned BBB (sf) rating to Class A, which has 20% credit support, and B-(sf) to Class B with 6% support.

For the first time, cryptocurrency collateral has been converted into a rated, tranched capital markets instrument. Bitcoin exposure, historically confined to exchanges and wallets, has been structured into bankruptcy-remote securities assessed by a mainstream rating agency. More importantly, the deal demonstrates that Bitcoin price volatility, custody mechanics and automated liquidation frameworks can be modelled within established credit enhancement and subordination structures. 

Lending against crypto collateral

The market for collateralised lending against crypto currencies, according to a November 25 report by Galaxy, grew to reach a record volume of $ 73.6 billion by the end of Q3, 2025. This includes decentralised finance (DeFi) and centralised finance (CeFi) (see discussion below). DeFi uses smart contracts built on public blockchains to create a loan transaction if certain conditions are met; it creates a pledge that liquidates the currency if the specific LTV ratio is breached. Hence, the lending is almost like auto-triggered leverage on the crypto holding. In Defi, users retain custody of their assets and interact directly with protocols via crypto wallets. (See our article on DeFi here). CeFi, or better known as centralised lending is like the usual process of applying for a loan, qualifying for one, accepting the terms and then getting into a contract. Of course, the lending happens on specialised lending platforms, such as Binance or Coinbase. 

On-chain and off-chain

As per IMF, crypto lending and borrowing is mostly channeled through crypto exchanges/financial digital platforms both centralized and decentralized, specialized in this business. The lending and borrowing through centralized (e.g., Nexo) and decentralized (e.g., Aave) platforms is also generally known as off-chain and on-chain lending, respectively. In the context of lending through centralized platforms, off-chain refers to the fact that the lending process and transactions are managed off the blockchain by a central entity. In contrast, lending through decentralized platforms is considered on-chain because it leverages smart contracts on a blockchain to facilitate lending and borrowing transactions. More importantly, on-chain transactions are actively facilitated by the platform which will ensure sufficient liquidity from depositors is available for lending

FeatureCentralised FinanceDecentralised Finance
IntermediaryCentralised platformNo intermediary (protocol based)
CustodyPlatform holds asset ie off-chainAssets are held on-chain 
ExecutionManaged internallySmart contract based automatic execution
TransparencyLimited since it depends on internal systemsFully on-chain and therefore more transparent
LiquidationPlatform managerAuto triggered via smart contracts
User experienceSimplerRelatively more technical

Regulatory concerns

Cryptocurrencies raise several regulatory concerns globally. Regulators are primarily focused on investor protection, given the extreme price volatility, risk of fraud, exchange failures and lack of clear legal recourse for users. Financial stability risk is another key concern, particularly as crypto markets grow in size and interlinkages with traditional financial institutions increase. Authorities also highlight AML, CFT and sanctions-evasion risks due to the pseudo-anonymous and cross-border nature of crypto transactions. Additional concerns include regulatory arbitrage, governance weaknesses at crypto platforms, custody and operational risks and the lack of uniform global standards regarding whether crypto should be treated as a currency, commodity, security or digital asset

In India, cryptocurrencies are not recognised as legal tender and are not considered currency under the law. The RBI has consistently expressed concerns regarding financial stability, monetary policy transmission, consumer protection, and illicit-flow risks. In April 2018, the RBI issued a circular prohibiting regulated entities from providing services to crypto businesses; however, this circular was set aside by the Supreme Court in Internet and Mobile Association of India v. RBI [Writ Petition (Civil) No.528 of 2018]. Despite the judgment, the RBI has maintained a cautious stance, warning that private cryptocurrencies may pose macroeconomic and systemic risks and advocating for strong regulatory oversight.

Most major crypto lending platforms are headquartered or legally domiciled in a small group of crypto-friendly financial jurisdictions rather than in countries that prohibit digital asset activity. A significant concentration is in the United States, particularly for larger, venture-backed platforms that target institutional or retail markets. Many crypto lenders are also structured through Cayman Islands and the British Virgin Islands due to flexible corporate law and tax breaks. In Asia, Singapore and Hong Kong have emerged as major hubs because they provide licensing regimes for virtual asset service providers and clearer regulatory frameworks for crypto trading and custody.

The United Arab Emirates (especially Dubai under the Virtual Assets Regulatory Authority or VARA) has become a fast-growing base for crypto exchanges and lenders due to its purpose-built digital asset regulatory regime. In Europe, activity is increasingly concentrated in jurisdictions aligned with the EU’s markets in Crypto-assets Regulations or MiCA framework, including countries like Germany and France, which offer regulated pathways for crypto custody and lending. Finally, Switzerland (Zug’s “Crypto Valley”) remains an important hub due to early legal recognition of digital assets and a mature fintech regulatory environment.

In short, most crypto lenders are located in jurisdictions that provide either (i) regulatory clarity with licensing pathways, or (ii) flexibility and structured-finance familiarity

How is the pledge of bitcoins registered?

Unlike land or securities, where a charge is perfected through a public registry or central depository, Bitcoin has no title registry on which a pledge can be recorded. A security interest over Bitcoin is, therefore, created contractually and perfected through control of the ‘private keys’. In practice, the borrower transfers the pledged Bitcoin into a segregated wallet held with a regulated custodian under a security and control agreement that prevents unilateral withdrawal and gives the secured party the right to direct liquidation of the Bitcoin held in that wallet upon default triggers. 

In the securitisation transaction at hand, this structure is embedded within a bankruptcy-remote issuer trust; the pledged bitcoin securing the underlying loans remains in custodian-controlled wallets, and the custodian agrees to follow the instructions of the trustee for investors.

Transaction Structure. Source: S&P Global

Why do borrowers take out a loan against crypto?

Borrowers might take crypto-backed loans to unlock liquidity without selling their crypto, preserving market exposure in case the crypto appreciates while avoiding a taxable disposal. Lenders market this explicitly (as “don’t sell your bitcoin”), because a loan does not trigger capital-gains events in many jurisdictions; selling does. 

For example, in India, transfers of crypto [or Virtual Digital Asset (VDA) as defined in 2(111) of Tax Act, 2025] are taxed at a flat rate of 30% and subject to a 1% TDS as well (see section 194(1) and section 393 of Tax Act, 2025) which makes collateralised lending a much better alternative to an outright sale for investors seeking cash as it avoids a taxable transfer

Transaction structure

Underlying loans

The underlying collateral pool consists of 5,441 fixed-rate, balloon-style Bitcoin-backed loans extended to 2,914 borrowers, with an aggregate outstanding principal balance of approximately $199.1 million as of December 31, 2025 (’cut-off date’). 

The loans are secured by approximately 4,078.87 BTC, which had an estimated fair market value of approximately $356.9 million at the cut-off date. This implies a weighted-average LTV of 55.78%, meaning the loans are materially overcollateralised at the borrower level.

While BTC collateral value (approx. $356.9 million) exceeds loan principal ($199.1 million), the securitised notes total $188 million ($160 million Class A + $28 million Class B). Credit enhancement to the notes is therefore driven by:

  • Borrower-level overcollateralisation (WA LTV ~56%);
  • Structural overcollateralisation of $11 million
    • $199.1 million – ($160 million Class A + $28 million Class B)
  • Subordination;
  • A funded liquidity reserve ($9.4 million i.e. 5% of the outstanding note balance at closing);

Characteristics of underlying loans:

  • Loan sizes range from $500 to $3,000,000;
  • Interest rates range from 8.45% to 13.90%;
  • Weighted-average interest rate: 11.80%;
  • Weighted-average remaining term: ~8 months at cut-off;
  • Maximum original tenor: 12 months

The loans are structured as bullet obligations, meaning borrowers repay principal and accrued interest in a single lump sum at maturity (or earlier via prepayment or liquidation). No scheduled amortisation occurs during the term.

If a borrower’s LTV rises to 80%, the loan is subject to liquidation through an automated engine that sells the BTC collateral to repay the loan.

Revolving Structure

The transaction features a 36-month revolving/reinvestment period. During this period, principal collections may be used to purchase additional eligible loans, subject to eligibility criteria and concentration limits. An initial $0.9 million funding account is available at closing to acquire additional loans. No principal is paid to noteholders during the revolving period unless an early amortisation event occurs. Such early amortisation triggers include:

  • Servicer default;
  • Effective advance rate exceeding 94%.

If triggered, the revolving period ends and principal begins to amortise sequentially (Class A first, then Class B).

Key sources of credit support include:

  • Borrower-level overcollateralisation (WA LTV ~56%);
  • Subordination;
  • Liquidity reserve account;
    • Funded at 5% of outstanding note balance at closing.
    • Steps down over time
  • Automated liquidation mechanism at 80% LTV

How does it address the volatility of Bitcoin prices

The transaction mitigates Bitcoin price volatility at both the loan and securitisation levels. At the loan level, underwriting is conservative, with loans originated at approximately 50% LTV, meaning borrowers pledge Bitcoin worth roughly twice the loan amount. As of the cut-off date, the pool had a weighted-average LTV of 55.78%. Margin notifications are issued at 70% and 75% LTV, and if LTV reaches 80%, the loan is automatically liquidated unless cured by additional collateral or partial repayment. This dynamic margin framework is designed to ensure that collateral is monetised well before LTV approaches 100%, thereby protecting principal.

At the securitisation level, protection is provided through multiple structural features. The collateral coverage is approximately 1.79x relative to loan principal, reflecting a substantial borrower-level cushion. In addition, the loan pool (~$199.1 million) exceeds the issued notes ($188 million), creating structural overcollateralisation of roughly $11 million. Subordination of the $28 million Class B notes beneath the $160 million Class A notes provides further credit enhancement, and a funded liquidity reserve of $9.4 million (5% of notes at closing) supports timely payment of interest and fees. While the underlying loans are short-term and bullet in nature, the transaction includes a revolving period, so volatility risk is managed primarily through LTV-triggered liquidation mechanisms and structural credit enhancement rather than tenor alone. 

Conclusion

In jurisdictions where the legal status of cryptocurrency and its ownership remains uncertain or not expressly recognised, investor appetite for securities backed by crypto assets may be tempered. Questions around enforceability, custody and recognition of digital asset collateral could weigh on institutional participation. However, the relatively high interest rates associated with crypto-backed lending structures may prove attractive in yield-constrained environments. 

For many investors, such securitisation offers an indirect pathway to participate in the economic upside of the cryptocurrency ecosystem, without holding the cryptocurrency directly and without assuming the operational, custody, or tax complexities associated with owning the asset itself. Whether this hybrid bridge between traditional capital markets and digital assets scales meaningfully will ultimately depend on regulatory clarity, investor risk tolerance and the continued maturation of crypto market infrastructure.

Lastly, the jurisdictional architecture is not incidental but foundational to transactions such as the present securitisation. A rated, bankruptcy-remote structure backed by Bitcoin-collateralised loans can emerge only where digital asset ownership, custody arrangements and enforcement mechanics are legally recognisable and commercially workable. The securitisation of bitcoin-backed loans is, ultimately, as much a product of regulatory geography as it is of financial engineering.

See our other resources:

  1. YouTube video: What is Securitisation?
  2. Tokenisation of Real World Assets – The Way Ahead for Creating Securities;
  3. Disrupting Traditional Card based Payments – Smart Contract based Payment Infrastructure using Stablecoin
  4. Cryptos: Are They Back in Business?;
  5. Security Token Offerings & their Application to Structured Finance; 
  6. Decentralised Finances;
  7. Cryptocurrency on the path to Legalisation?; 
  8. Cryptocurrency – A Cautionary Tale for India; 
  9. Trustless System; 
  10. Blockchain based lending; A peer-to-peer system; 
  11. Financial Services firms foray into the metaverse.

Tokenisation of Real World Assets – The Way Ahead for Creating Securities

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-Subhojit Shome (subhojit@vinodkothari.com)

Introduction

The tokenisation of real-world assets (RWA) using cryptographic technology is rapidly emerging as a transformative innovation in the financial ecosystem. Note here that the term RWA refers to all traditional assets including both real assets as well as traditional financial assets that exist in the physical world. By leveraging blockchain technology, tokenisation enables the representation of tangible assets, such as real estate, commodities, and artwork, or intangible assets like intellectual property, as digital tokens on a distributed ledger. This development is reshaping the way assets are managed, traded, and accessed, creating new opportunities and challenges.

RWA tokenisation has garnered attention due to several converging factors. Blockchain technology offers a streamlined alternative to traditional systems by reducing intermediaries, lowering transaction costs, and ensuring faster settlement times. Fractional ownership of high-value assets makes them accessible to a broader range of investors, enhancing market liquidity. Blockchain’s immutable nature provides a transparent record of transactions and ownership, reducing fraud and enhancing trust. Additionally, tokenised assets are borderless, enabling seamless cross-border trading and investment opportunities.

According to market reports, the capital locked in tokenised RWA is expected to touch $50 billion by the end of 2025 surpassing all previous records. In 2024, the ecosystem had achieved a 32% annual growth rate.

In this article, we look at the impetus behind this technology, its status of adoption in India and critical issues that act as roadblocks in its development. 

Development

The tokenisation market has witnessed significant advancements in a number of areas. Real estate tokenisation has enabled properties to be tokenised for fractional ownership, reducing entry barriers for smaller investors. Similarly, commodities like gold and other precious metals have been tokenised, providing an efficient means of trading and ownership. High-value artworks and collectibles are being tokenised to allow multiple investors to own shares in masterpieces. Tokenisation has also extended into private equity and debt markets, enabling innovative funding mechanisms and the development of secondary market opportunities. Moreover, the emergence of regulated tokenisation platforms in certain developed economies (e.g. the UK) underscores the growing maturity of this market.

Figure 1: Benefits of Tokenisation of Real-World Assets using Blockchain

Fractional ownership creates liquidity in traditionally illiquid assets. It also democratises investment by enabling wider participation through reduced minimum investment thresholds. Here the emphasis is not on reduction of any regulatory investment threshold but rather, being represented in the digital world, RWA tokenisation allows infinitesimally fractional parts of an asset to be bought and sold. Cost efficiency is achieved by reducing reliance on intermediaries, which lowers transaction and administrative costs. Blockchain’s transparency increases trust and reduces fraud risks. Furthermore, smart contracts enable automation of compliance, dividend distribution, and other processes.

Process

The process of RWA tokenisation broadly involves the following steps –

Figure 2: Process of RWA tokenisation

In the tokenisation process one may note that the custody of the underlying asset is separated from the ownership of the asset. While the ownership is represented by use of tokens, the underlying asset may need to be held with a custodian ‘off-chain’ (i.e. in the physical world). 

Issues

However, tokenisation is not without challenges. Regulatory uncertainty remains a significant hurdle due to inconsistent global regulatory frameworks. Technology risks, such as cybersecurity concerns and vulnerabilities in smart contracts, could undermine trust. Market volatility is another concern, as tokens may experience higher price fluctuations compared to their underlying assets. Some tokenised assets may face illiquidity risks if the secondary markets lack sufficient depth. Additionally, legal ambiguity regarding ownership rights and the enforceability of tokenised claims persists in many jurisdictions.

Several key regulatory considerations must be addressed. Asset classification is crucial for defining whether tokenised assets are securities, commodities, payment instruments or another category altogether.

In India, regulatory uncertainty remains the key issue in the implementation of RWA tokenisation. Say, for instance, there is tokenisation of real estate in which the management of the property is overseen by the issuer or by a manager appointed by such issuer and fractional ownership units are offered for sale to retail investors. Such a transaction starts to take on the colour of a collective investment scheme and SEBI may intervene and mandate the issuer to register as such with the regulator. In the case of real estate these schemes can also be viewed as having a structure akin to a REIT especially SM REIT. 

The SEBI is yet to notify any regulatory prescription specifically for the purposes of regulating crypto-assets and or token offerings to the retail public and it has been reported in the press1 that the securities market regulator has informed the Parliamentary Standing Committee on Finance that regulation of crypto-assets would be difficult given the nature of technology that sustains them. In the matter of, An RTI enquiry, as referenced in the matter of Appeal No. 4532 of 2021 filed by Rohith Methayil Rajagopal, was raised with the SEBI’s CPIO as to the stand of Regulator with regard to “digital trading and possession of Cryptocurrencies by the Indian Citizens” and if SEBI had any “legal document and its date that permits digital trading of Bitcoin / Cryptocurrencies in India”. The response of the CPIO, as affirmed by the appellate authority, was that it did not have the knowledge of either matter. Based on this one can conclude that the Regulator has not, yet, formalised its stance over dealings in crypto assets. Recently, however, the Regulator has expressed an openness to a multi-regulator based oversight framework for crypto-assets.2

There have been interest shown by mutual fund houses to invest in ETFs or indices on blockchain-based projects and crypto-assets and draft scheme information documents were filed with the Regulator. SEBI, however, has expressed its reservations3 on approving such funds/ fund of funds. Highlighting high degree of regulatory uncertainty when it comes to crypto-assets which is not an ideal situation either for business houses looking to raise funds using crypto-assets or for investors who have invested in such assets.

Another major inhibitor is the tax treatment of such tokenised assets. This is because given the construct of such token it will get classified as virtual digital asset  under section 2(47A)4 of the Income Tax Act, 1961. The implication of this is that income on sale of such assets will get taxed at a flat rate of 30%. Other than the cost of acquisition, any other expenses incurred with respect to such assets are not allowed to be deducted while computing the income. Further, any loss from the transfer of such assets are also not allowed to be set-off against such income or under income computed under any provision of the act. Accordingly, such losses are also not allowed to be carried forward to any succeeding assessment years.

GIFT City

Recently, however, there has been some headway in asset tokenisation in Gujarat International Finance Tec-City (GIFT City) which may be poised to host India’s inaugural regulated platform for the tokenization of real estate and infrastructure assets. This initiative aims to democratize investment opportunities by enabling fractional ownership through digital tokens, leveraging blockchain technology to enhance liquidity and transparency in the sector. To this extent the IFSCA has constituted an ‘Expert Committee on Asset Tokenization’; the terms of reference of this committee are as follows –

  • Develop regulations and policy guidelines for tokenization of real and physical assets
  • Examine the legal validity of Smart Contracts
  • Develop a risk management framework for digital tokens
  • Examine the role of Digital Custodians in the asset tokenization model and develop operational policy measures

Conclusion

Tokenisation is a transformative technology that has the capability to change the very nature of real world assets in the way they are managed and traded. The flow of capital into this sector is an indication of the potential of this sector in contributing to the economic growth of a country. In the formation of the working group on crypto-assets to reform US digit asset regulations, the US has taken stock of this development in the market and the need to make such technologies mainstream. It is encouraging to see India’s intention to move ahead with such innovation in the GIFT City. It is now time to wait and watch whether tokenisation will find acceptance in the economic mainstream and for this to happen a clear regulatory architecture has to emerge in India.

  1. Why has the market watchdog said it is difficult to regulate such currencies? What is the status of the bill? – Article in The Hindu, June 12, 2022 ↩︎
  2. SEBI considers regulatory role in crypto trading, diverging from RBI’s approach. Here’s what experts think – Article in the Economic Times, May 17, 2024 ↩︎
  3.  Sebi says no to mutual funds for cryptos. What are your alternatives? – Article in the Economic Times, December 30, 2021 ↩︎
  4. Virtual crypto-assets as defined under Section 2(47A) of the Act means—
     any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically; a non-fungible token or any other token of similar nature, by whatever name called;
    any other crypto-asset, as the Central Government may, by notification in the Official Gazette specify. 
    However, the Central Government is empowered to exclude any crypto-asset from the definition of virtual crypto-asset by a notification in the official gazette on this behalf.
    ↩︎

Cryptos: Are They Back in Business?

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A Brief Guide to Trading and Investment Avenues in Crypto Markets and DeFi Services

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Cryptocurrency – A Cautionary Tale for India

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Recent Events in the Crypto-world and a Need for Regulatory Oversight

– Subhojit Shome (subhojit@vinodkothari.com)

Introduction

There are two recent events in the world of crypto that warranted this article – the first one, in order of chronology, fundamentally altered the way that a blockchain (the underlying ledger) for cryptocurrency validates transactions while the second exposed how a cryptocurrency, without underlying value, can be used to window dress a balance sheet and lure in investors.

The second incident, of course, refers to the FTX debacle that has received global media coverage and continues to grab headlines. The first event, Ethereum moving to ‘proof of stake’ consensus mechanism, however, may be a more obscure event to the public eye and likely to have caught the attention of only the hardcore crypto enthusiast, fintech departments of financial institutions and the financial stability divisions of financial market regulators and ministries.

This article, to all intents and purposes, is a ‘cautionary tale’ where we use these two events to explore how cryptocurrency, whether deliberately or inadvertently, may build a house of cards and there is an urgent imperative that regulators look beyond PML/ CFT issues, the ‘usual suspects’ when it comes to crypto, and delve into issues surrounding investor protection and market surveillance.

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Recent Trends in Crypto-Industry: India & Abroad

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-Megha Mittal

(mittal@vinodkothari.com)

“Opportunity amidst tragedy” would likely be the most suitable phrase to summarise the journey of cryptos during the Global Pandemic- with disruption taking a toll on people and economies, and physical proximities massively restrictred, cryptos have outshone traditional assets, by virtue of its inherent features- easy liquidity, access and digitalisation.

Further, as countries around the globe attempt to stimulate their economies by opening floodgates of liquid funds, the ‘digital natives’ have and are expected to increasingly venture into adventure-some investments- think, cryptos. And while such adventurous investing may be short-lived, the results may infact have a long-lasting impact- it is this expected impact that has sets the ‘bull’ stage for cryptos in times to come.

In this brief note, we cover the recent highlights and developments in the crypto-industry, also discussing developments in the relatively new concepts of stablecoins, crypto-lending.

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