Helio Cryptocurrency Lending Operation, Conx2share Banking Wallet for the Transmission of Funds, and the Facilitation of Risk Amelioration

This memorandum explores Helio’s lending operation for the cryptocurrencies, the creation of a facility for the transmission of funds associated with that operation and a platform for option contracts (puts and calls) associated with each cryptocurrency, and the facilitation of a risk amelioration approach to deal with the risks inherent within such a lending operation. The creation of the risk amelioration facility starts with Conx2share which has created a very unique app which among other things, has an even more unique e-wallet component.

I envision that this full-service operation starts with a joint venture agreement between Conx2share and Helio. Helio would loan money against cryptocurrencies[1]. Simultaneously, Conx2share provides, among other things, the funding transmission vehicle, via the e-wallet components of its app, called Conx2share Banking Wallet (or “CBW”). Presumably, Helio’s loans would be on a nonrecourse basis. Otherwise, the loans become unattractive to the borrowers and there is a substantial overhead associated with credit risk analysis which would probably not be economically feasible. In particular, the whole purpose of their borrowing, typically, is to have more capital to generate more cryptocurrency (which will mean more cryptocurrencies to fund and to sell, while adequately hedged).

Simultaneously, I envision a structuring mechanism involving a hedging operation to minimize if not eliminate risk all together. The concept expressed by Helio was that the hedging operation would simply be to sell the shares which are pledged for the lending initiative. While that concept does indeed provide for the liquidity necessary to fund the loans, as the “hedging” sales proceeds would presumably be twice the amount loaned (with a 50% loan to value), there is a substantial residual risk, if nothing more is done. The risk associated with the lending business in general, without the lender selling the pledged currency, is that the currency could drop by more than 50% resulting in a loss to the lender. This is clearly an unacceptable risk.

On the other hand, selling the underlying or pledged currency incurs a different and opposite risk. This risk is associated with the prospect for upward price movement of the currency, following the sale of the collateralized pledged currency. In other words, if the currency price rises after the lender’s sale of the pledged currency, the borrower will then repay the loan, resulting in a potentially significant, even unlimited, loss for Helio as Helio is forced to buy back the currency at a higher price.

So the nature of this lending business is that Helio could lose if it sells the pledged coins but could also lose if it does not. So this memorandum now turns to the risk amelioration strategies. Many of these strategies are adopted from our stock loan program, designed to maintain “Delta Neutrality” and thus avoid risks attending either price increases or price decreases of the pledge stock.

First, part of the consideration could be contingent in nature. In the event that the price for the coins increases significantly, some of the coins could become owned by the lender as part of the consideration for the loan. For example, if the pledged security involves 20 coins and they increase in value by more than, for example, 20%, one of the coins could become the property of the lender as part of the consideration. This kind of a feature, of course, reduces the risk while minimally impacting the borrower’s upside potential. A trade-off which is probably quite palatable to the borrower, particularly the borrower who uses the loan proceeds to acquire more coins.  In other words, this arrangement involves a low cost to the borrower (arguably no cost to the borrower) but a significant benefit to the lender. In addition, we could sell buy out of the money options (at above market strike prices). This would limit the loss if not eliminate the loss associated with price increases following the lender’s sale of the pledged currency. Indeed, a portion of the financial model would be to fund those options from the sale of the pledged securities. This obviously has the effect of possibly reducing profits but enhancing the longevity of the business by protecting against risk.

Those options should not be too expensive and the owners of the currencies who are selling the options would still profit, in fact profit doubly in the sense that they are getting cash for the securities they already own, albeit limiting their upside potential and they would still profit if there is an exercise of the option. Indeed, the strategy would be that they would have more funding available for their mining operations or coin purchase endeavors. Additionally, Helio would require the possession of the securities which are subject to the option contract. This provides yet another opportunity of further hedging by facilitating the opportunity for further coin sales. And, analytically, these sales necessitate a funding of far less than 50% of the value in order to acquire possession of the coins.

Inevitably, in addition to the foregoing benefits, this lending operation, particularly with the dynamics of the hedging facilities, will dramatically enhance the liquidity associated with cryptocurrencies. We would also be able to provide the platform for the trading of such currencies and the facilitation of the option contracts. In other words, we would be able to charge others for the purchase of option contracts, put or call, on cryptocurrencies.

Finally, we are uniquely well-suited, through our resources, to provide the analytics to orchestrate the hedging operations. Conx2share is well suited to provide the vehicle for the funding operations and transmission of funds associated therewith. Helio has access to the funding of the cryptocurrency lending initiative and the financing for the lending.[2]

[1] I would not do more than 50% loan to value for a number of different reasons, at least initially. First, there are plenty of fish out there, people who would like liquidity against their shares, particularly on a nonrecourse basis. If we ever get to the point where we have more funds available for funding than we have funding opportunities, we could reevaluate that policy consideration. However, the risk factor is obviously enhanced the greater the loan to value. On the other hand, by charging a greater amount for greater leveraging, including perhaps upfront fees and/or loan reserves, or the granting of a call option to the lender, in whole or in part, perhaps that differential would fund the hedging operations envisioned herein.

[2] Obviously, the resources necessary for the lending are substantially reduced to the extent of the sale of the coin as part of hedging operation.