Long Island Ask The Experts: Cryptocurrency as collateral: Is it worth the risk? - by Lindsay Mesh Lotito & Kevin Henning
Cryptocurrency has migrated to the portfolios of an increasing number of borrowers. As digital assets become more common, traditional financial institutions must decide whether and how these assets should factor into underwriting decisions.
The question is not simply whether cryptocurrency has value, but whether that value can be measured reliably, whether it can withstand market volatility, and whether the asset provides the degree of certainty ordinarily expected of collateral or other assets used to support a loan. Although recent federal legislation has attempted to regulate portions of the cryptocurrency market, the volatility associated with major cryptocurrencies, together with continuing uncertainty surrounding stablecoins, suggests that lenders should proceed cautiously before treating cryptocurrency as equivalent to traditional assets.
Any underwriting analysis should begin by identifying the particular digital asset at issue. “Cryptocurrency” encompasses a range of assets with materially different structures and risk profiles; two broad categories are traditional cryptocurrencies and stablecoins.
Traditional cryptocurrencies are generally decentralized thus not directly tied to a government-issued asset such as the U.S. dollar; Bitcoin, Ethereum, and XRP are examples. Stablecoins, by contrast, are generally designed to maintain a relationship to a government-issued money and involves a more centralized structure. Although other forms of digital assets exist, these two categories have received substantial investment and research and framework for evaluating underwriting risk.
A lender considering a traditional cryptocurrency should distinguish between assets with a substantial operating and trading history and relatively new coins for which there is insufficient historical information to evaluate performance. Newer cryptocurrencies lack the data necessary to determine whether their stated value is a reliable measure as an asset available to support a loan.
Even established cryptocurrencies such as Bitcoin and Ethereum present a significant underwriting challenge. Their historical performance demonstrates substantial and rapid changes in value. These changes may correlate with external market factors, but they cannot be fully explained or predicted in the same manner as more traditional investments. The possibility of appreciation should not obscure the corresponding risk of rapid depreciation.
Traditional investments such as stocks, bonds, and mutual funds also fluctuate in value, but established underwriting practices provide lenders with a relatively familiar basis for assessing liquidity, valuation, and market risk. The volatility of cryptocurrency makes it more difficult to provide the same level of certainty.
Stablecoins may initially appear more suitable for underwriting because they are designed to maintain a relationship to a government-based currency, but that does not eliminate the risks that concern lenders.
The Guiding and Establishing National Innovation for U.S. (GENIUS) Act represents a significant legislative effort to establish a framework for stablecoins. While the GENIUS Act does create regulatory legitimacy for stable coins, it does not create a rule for underwriting. Whereas the CLARITY Act (Digital Asset Market Clarity Act), if passed, would provide a clearer classification and regulatory status of cryptocurrencies, which may make banks more willing to recognize cryptocurrency on the balance sheet. Regulation does not address the issues of maintaining price stability and reducing the risk of a panic-driven run on the asset. Maintaining a stable price across markets requires efficient arbitrage. At the same time, efficient arbitrage may facilitate rapid selling and thereby increase the risk of a panic run. Alternative legislative approaches - including proposals that would permit dividend payments - could potentially improve stability and reduce run-risk, but these are yet to be enacted.
Until the regulatory and market mechanisms supporting stablecoins demonstrate sufficient resilience, lenders should continue to evaluate them conservatively and cryptocurrency should not yet be treated as interchangeable with traditional assets for underwriting purposes. The current level of volatility and uncertainty makes it difficult to assign cryptocurrency the same evidentiary weight that lenders ordinarily give to traditional assets.
If a lender elects to consider cryptocurrency, concerns could be reduced, but not eliminated, through conservative valuation. One approach is to apply a substantial “haircut” to the stated or observed market value of the cryptocurrency, recognizing only a fraction of that value when evaluating the borrower’s assets. This limits the amount of credit extended to a fraction of that value, resulting in a cushion intended to provide protection against future adverse price movements.
For lenders, the central issue is not whether cryptocurrency has value; it is whether that value is sufficiently predictable, durable, and liquid to support a lending decision. At present, the volatility of cryptocurrencies and the unresolved stability and run-risk questions surrounding stablecoins counsel in favor of conservative underwriting.
Cryptocurrency may eventually become a more routine component of a borrower’s balance sheet, and regulatory developments may provide lenders with greater confidence in valuing digital assets, but until that occurs, lenders should resist the temptation to treat cryptocurrency as they would traditional assets. Where a lender does consider cryptocurrency, disciplined valuation, meaningful haircuts, and adequate collateral cushions remain prudent tools for managing the risk.
Lindsay Mesh Lotito is a partner at Forchelli Deegan Terrana LLP, Uniondale, N.Y. Kevin Henning was a 2026 summer law clerk at the firm. He is a student at Touro Law School.