Bitcoin Lending Facility Agreements: The “HODLER’s” Path to Fiat Liquidity

Institutional Momentum: Bitcoin Lending Moves Centre Stage

The market for Bitcoin and other digital assets linked lending is undergoing a shift toward institutional legitimacy. In July 2025, JPMorgan announced plans to offer loans secured directly against client held Bitcoin and Ethereum and Cantor Fitzgerald announced a USD 2bn “Bitcoin Financing Business” initiative to provide leverage to investors who hold the world’s most valuable digital asset. This follows earlier moves to accept crypto ETF shares as collateral and aligns with growing demand from digital asset holders (or ”HODLERS”) for an option to retain their economic exposure in the underlying digital assets and access liquidity via structured loans, rather than liquidate.

This briefing summarises some of the legal and commercial considerations for structuring Bitcoin-linked facility agreements under English law, including collateral valuation, documenting and enforcing security and recognising the potential requirements of a future secondary trading market in relation to such loans.

The Legal Nature of Bitcoin under English Law

Bitcoin has been recognised as property under English law (AA v Persons Unknown [2019] EWHC 3556), [1] but not as 'money' or a chose in action. These distinctions have implications for the transfer of legal title, security structuring and enforcement rights.

Key points for loan terms:

1. Title Transfer vs Custodial Lending Structures

There are two main structural approaches:

1. Title Transfer: The lender becomes the legal owner of the Bitcoin [2] or other digital assets for the term of the loan. This structure simplifies enforcement and may be good for the lender, but can create adverse tax, accounting, or regulatory consequences for certain borrowers. Further, it leaves the borrower at risk of rehypothecation by the lender and becoming an unsecured creditor of the lender in the event of its insolvency (a risk which became reality in 2022-23 with BlockFi, Genesis Global and the collapse of FTX).
2. Custody: subject to the terms of the arrangement, the borrower retains title while custody is transferred to the lender (or a third-party custodian). This structure can accommodate rehypothecation and more flexible collateral release terms but requires precise custodial arrangements and a clear legal framework. It can be more secure for the borrower as the custody can be managed through a trusted independent third party with an acceptable credit rating (e.g. BNY Mellon), rather than custodied with the same entity that is the lender, and documented in a way that avoids the lender’s insolvency risk.

2. Security Over Bitcoin Collateral

Traditional security interests under English law (e.g. legal mortgage, fixed charge) do not always apply cleanly to decentralised assets like Bitcoin. [3]

Considerations include:

1. Legal characterisation of the collateral (i.e. intangible property);
2. Use of multi-signature wallets, hardware custody, or on-chain smart contracts to enforce rights;
3. Proper documentation of perfection, priority, and control, particularly where collateral is held via third-party custodians; and
4. Ensuring enforceability across borders and across time zones in distressed scenarios.

While parties may seek to structure a Bitcoin lending facility to fall within the UK Financial Collateral Arrangements (No.2) Regulations 2003 (“FCARs”), Bitcoin does not currently fall within the statutory definition of ‘financial collateral’ required by the FCARs, which covers cash, financial instruments and credit claims [4]. The application of the FCARs is useful to lenders because they provide a favourable enforcement and insolvency regime.

That said, FCAR-style provisions (such as margining and contractual appropriation) can be used and hybrid structures involving fiat or tokenised instruments may offer partial benefits. It is noted there is an emerging view that digital assets could potentially fall within a broader or future interpretation of financial instruments (especially as EU/UK regulatory regimes evolve, for example under MiCA [5] in the EU or a future UK crypto regime), therefore parties should stay alert to regulatory reform.

3. Interest Payments: Managing a Non-Income-Producing Asset

Bitcoin does not generally generate yield. Therefore, while it may offer an acceptable form of collateral, the borrower will still need to demonstrate its ability to repay the loan together with any interest.

This presents unique structuring issues:

1. Fiat interest: Paid in GBP, USD, or stablecoins on a scheduled basis;
2. Payment-in-kind (PIK): Interest accrues in Bitcoin or other digital assets; or
3. Pre-funded interest: Held in escrow at the outset or deducted from loan proceeds.

Agreements should cover conversion mechanics, valuation of PIK payments and FX volatility when converting between crypto and the fiat payment currency.

4. Default, Enforcement and Liquidation

Bitcoin and other cryptocurrencies are volatile, often experiencing price swings of 10% or more in a day. Lenders therefore need to address this carefully in the documentation including:

1. Clearly defined default triggers (e.g. failure to pay interest, margin breach, insolvency);
2. Volatility risk: Loan-to-Value (LTV) ratios, margin calls, and top-up obligations;
3. Liquidation procedures: pre-agreed sale methods (e.g., via OTC desk or exchange) with price safeguards and disposal periods; and
4. Custody and access: ensuring the lender has operational control over the collateral in default scenarios, especially where wallets are jointly controlled or held with third-party custodians or in smart contract structures.

5. Regulatory and Licensing Considerations

Although Bitcoin itself is not a regulated instrument in the UK, there are elements of the regulatory regime which are relevant to it. Firms entering into these arrangements must consider whether their activity triggers these elements. In particular, firms should be aware that if they provide exchange or custody wallet services then they may need to register with the UK Financial Conduct Authority (FCA). This is so that the FCA can assess compliance with Anti Money Laundering (AML) and Know Your Customer (KYC) obligations. Additionally, certain financial promotions relating to Bitcoin will be within scope of the financial promotions regime and need to be approved by an authorised firm unless they fall within an exemption. The UK is in the process of developing its regulatory regime in this area, including moving forward with plans to bring more activities within scope of the Financial Services and Markets Act regime that applies to regulated instruments. Lenders should also consider the impact of international regulations such as MiCA (EU), and the proposed UK Digital Securities Sandbox regime.

6. Tax and Accounting Issues

Tax treatment for the lender and the borrower will depend primarily on their respective jurisdiction of tax residence and / or operation and on the structure and detail of the loan, the related security arrangement and the terms applicable to the collateral.

A few potential issues to bear in mind, for example: 

1. Crypto-to-fiat loans may give rise to taxable profits, gains or losses (which may be capital or income in nature, depending on the circumstances);
2. Interest receivable by a UK lender may be subject to UK income or corporation tax;
3. Interest payable by a UK borrower (or otherwise from the UK) may be subject to withholding tax (UK income tax deductible at source);
4. Payment-in-kind may have complex VAT or stamp tax implications; and
5. Mark-to-market accounting may impact balance sheet treatment, particularly for lenders holding collateral on-book and give rise to tax charges on valuation adjustments.

Each loan transaction will therefore require legal and tax advice to fully review the relevant issues for the lender and the borrower and can vary depending on the relevant jurisdiction and entity’s accounting arrangements.

7. Valuation of Bitcoin Collateral and Margin Maintenance

A central issue in Bitcoin-backed lending is the valuation of the collateral; a task complicated by Bitcoin’s high volatility, fragmented trading venues, and lack of central pricing.

Valuation Mechanics:

1. Mark-to-market valuation typically uses a blended price feed from multiple exchanges or a reputable third-party oracle.
2. Valuation frequency may vary by lender profile with institutional lenders choosing to mark daily or intraday to manage risk dynamically.
3. Some facilities may use annual, quarterly or monthly valuations where volatility exposure is less acute or the collateral buffer is high.
4. For shorter-term facilities (30–90 days), valuation may be fixed at inception, subject to renegotiation only if significant price movement occurs.

Documentation should clearly establish:

1. The pricing source (e.g. CoinDesk Index, Coinbase/Binance spot averages).
2. The time of day for valuation – this having a significant bearing given that cryptocurrency markets trade globally 24/7.
3. Whether off-market periods (e.g., weekends or exchange outages) defer valuation.
4. The right to challenge or verify price determinations. 
5. The implications of LTV covenant breaches such as “soft” vs “hard” covenant breaches and cure rights. 

Margin Requirements and Top-Ups: 

Given Bitcoin’s volatility, it is anticipated that lenders will require:

1. An initial LTV threshold (e.g. 50–60%);
2. An automatic margin call mechanism if LTV rises above a critical threshold (e.g., 70%), subject to any cure rights the borrower may have;
3. A contractual obligation on the borrower to top up collateral as a form of cure right (whether in BTC or stablecoins) within a defined period (often 24–48 hours); and
4. Liquidation rights for the lender if margin is not restored in time or the LTV covenant is not otherwise cured.

8. Secondary Trading and Transferability

As the market for Bitcoin lending matures and financial institutions move towards accepting digital assets as a form of security, secondary trading of such facilities is expected to grow. However, it could take some time for funds and trading desks to become accustomed to navigating and managing this new asset class, both in terms of the collateral valuation and security arrangements, as well as the practical implications of trading loans linked to cryptocurrency with a different form of infrastructure and regulatory requirements.

Secondary trading of digital assets facilities presents new distinct challenges. Smart contracts do not fit into the current trading framework, where trades are made through brokers using the Loan Market Association (LMA) English law documentation or Loan Syndications and Trading Association (LSTA) New York law documentation and settlement is via legal transfer or assignment with an Agent maintaining the register of lenders.  Participation agreements based on LMA/LSTA recommended forms for standard fiat loans will require bespoke terms for the passing on of interest in the form of digital assets, and lenders and secondary market participants will need corporate wallets and the appropriate infrastructure to practically manage the assets and risks associated with holding them.

Facilities that follow a more traditional documented form will likely need to go beyond the question whether Borrower consent is required for any sale.  A third-party custodian agreement may need to be novated or assigned to the new lender (or enforcement rights provided to an Agent or Trustee) and there may be operational requirements for wallet access, custody reconfiguration or control of collateral.

Due diligence on enforceability of the collateral arrangements and valuation and pricing will be less standardised than for traditional loans, and the lack of a standard LMA-style trading confirmation protocol for digital asset loans means that bespoke representations, transfer terms and legal review remain essential.

9. Governing Law and Documentation Framework

English law is widely used for syndicated lending, structured finance, derivatives and loan trading documentation; meaning lenders, funds and law firms are comfortable adapting those models to crypto-based facilities. 

Given that England is one of the first jurisdictions to create clear jurisprudence around the proprietary nature of cryptoassets and English common law provides the flexibility to develop and/or extend existing and well-established legal principles traditionally applied to money to the application of cryptoassets, it makes it a leading venue for disputes involving digital collateral [6]. English law judgements are widely respected and enforceable internationally, providing a reliable choice of law for facilities where commercial sophistication and legal certainty are paramount.

While ISDA and the LMA have not yet published digital asset lending templates, it is possible to adapt the LMA leveraged loan formats with crypto-specific terms or enter into bespoke agreements with ISDA-style provisions for margining, valuation and events of default.

10. Market Precedent and Maturity

At present, Bitcoin-backed loans remain a developing product class. While increasing institutional participation is pushing toward standardisation (for example via exchange-led institutional lending platforms), the following remains true:

1. There is no widely adopted market precedent or documentation suite akin to LMA, LSTA or ISDA standards (although some precedent is developing through bilateral OTC facilities, often adapting LMA leveraged loan models with crypto-specific annexes).
2. Structures may vary significantly depending on:
   1. Whether the lender is a regulated bank, crypto-native fund, or proprietary desk;
   2. Jurisdiction of parties and applicable regulatory frameworks; and
   3. Duration and size of the facility.
3. Custody models, especially involving third-party custodians or on-chain smart contract vaults, are evolving rapidly, with a no-one-size-fits-all approach.

As the market institutionalises further (especially with the entry of banks like JPMorgan), we expect to see greater convergence around commercial terms, pricing mechanisms and collateral practices. For now, each transaction still requires bespoke structuring, risk modelling and careful legal drafting.

Conclusion

The institutionalisation of Bitcoin lending signals a pivotal shift: wholesale markets are poised to mature, and sophisticated digital asset holders demand liquidity without divestment. 

As Bitcoin lending transitions from speculative finance to institutional asset class, for lenders and borrowers alike, the opportunity is significant; but so are the legal, regulatory and operational challenges. Proper structuring, valuation clarity, and enforceability will be central to the success of these arrangements as they move into the financial mainstream.

If you are considering entering into a Bitcoin lending facility, whether as a lender, borrower, custodian, or fund participant, please contact your usual relationship partner or a member of our Special Situations, Credit & Trading Team.

Footnotes:

[1] In AA v Persons Unknown [2019] EWHC 3556 the English High Court granted a proprietary injunction over Bitcoins used as a ransom payment in cyber extortion. This decision (which has been consistently applied in other English court decisions since) supports the position that cryptocurrencies can legally constitute “property” under English law for the purposes of proprietary injunctions and freezing orders. Further, the Digital Assets Bill (which will confirm that certain digital assets, such as crypto-tokens, can be recognised as property, even if they do not fit into the two traditional categories of personal property recognised by the law) is currently going through the legislative process, with the second reading of the bill before the House of Commons having taken place on 16 July 2025.

[2] The term “Bitcoin” when used in this article with a capital “B” is intended to refer to the digital currency “bitcoin” where the context requires and not the Bitcoin network protocol.

[3] The Law Commission has concluded that possessory security arrangements (e.g. pledges) are unsuitable for digital assets (see paragraph 8.32 of the final report on digital assets). They have however suggested that a control-based security interest could be developed under English common law.

[4] The Law Commission of England and Wales (in its Final Report on Digital Assets dated 27 June 2023) recommended that a number of statutory amendments are made to the FCARs to clarify how key definitional terms work or are intended to work in the context of cryptoassets (see paragraphs 8.69, 8.86, 8.87) and that the UK Government consider a bespoke statutory legal framework for cryptoasset collateral arrangements (paragraphs 8.104-8.106)

[5] MiCA: the Markets in Crypto Assets Regulation, the first European-level piece of legislation that introduces a comprehensive regulatory framework for crypto-assets.

[6] The Law Commission of England and Wales are also currently consulting on how private international law applies to digital assets which may yet provide further useful guidance on issues of jurisdiction and applicable law in the context of disputes relating to digital assets.