People borrowed from each other since the beginning of time, but formal lending dates back to Ancient Rome. In our society, banks have risen to become the number one retail lender with other forms of debt emerging, including credit card debt, facilitated via credit card companies. However, it wasn’t until the rise of the Internet that the lending industry truly exploded. In fact, the lending industry has taken advantage of many technological advancements, such as AI, IoT, cryptographic security, including AML and KYC policies, and is now in an excellent position to take advantage of the latest developments offered by another emerging technology: blockchain.
While blockchain can serve as the infrastructure to create fully decentralized peer-to-peer lending platforms, traditional lenders and facilitators can use blockchain to validate transactions, verify the legitimacy of all parties involved, and perform routine account administration tasks in real time, reducing costs and accelerating the process. Smart contracts, a standard tool made possible through blockchain, can be used to facilitate payments and information exchange between the parties using assets, securities, or digital tokens as collateral. Blockchain-based ecosystems, including lenders, employers, and borrowers can be used to incentivize borrowers and teach positive financial habits.
Below are some current and potential concepts for applying blockchain technologies in lending, as well as examples of companies that have already begun implementing these ideas.
Blockchain is a faster way to get credit
Traditional financial platforms and institutions require the usual level of bureaucracy involved in getting credit, which includes copious amounts of paperwork, credit checks, and more. In some cases, it may take weeks or even months for a borrower to get a loan. Blockchain facilitates fast and secure transactions, executing payments, and providing reports and accountability. Smart contracts can streamline the loan disbursement and repayment process with various assets or tokens used as collateral.
SALT, a Colorado-based company and platform, allows cryptocurrency traders to use their crypto assets as collateral for loans, keeping collateral assets safe in a fully-audited, ultra-secure architecture throughout the life of the loan.
Blockchain streamlines peer-to-peer lending
Peer-to-peer lending networks have been considering transitioning to blockchain because it offers a viable solution to many challenges associated with P2P lending, including reducing cost while maintaining security and transparency, using smart contracts for deal execution, increasing the diversity of assets that can be added as collateral, and improved mechanisms for credit checks and identity verification.
Ripio Credit Network, a Grand Cayman-based company and a peer-to-peer global credit network protocol based on cosigned smart contracts, connecting lenders and borrowers all over the world in any currency, primarily focused on Latin America, where 63% of people are unbanked.
Debitum Network, a Lithuania-based company provides crowdfunded loans to SMEs who have mostly lacked access to capital for their businesses.
Blockchain enables cross-border lending
Generally, most lending platforms don’t allow cross-border loans due to the costs of money transfers, including exchange and transfer rates. Blockchain enables global fund transfers at much lower rates, which could incentivize international organizations to loan funds benefiting developing countries as well as citizens of various countries living abroad.
ETHLend — a Switzerland-based company and a decentralized financial marketplace built on top of Ethereum, allows lenders and borrowers all over the world to create peer-to-peer lending agreements. With ETHLend anyone in the world can borrow or lend, as long as they have an Ethereum address.
Blockchain helps to establish credit history and identity
There are over 2 billion unbanked or underbanked individuals in the world. These are individuals who either don’t have a bank account or do have one but don’t qualify for traditional banking services, such as loans. Most of these individuals do not have a credit history, and sometimes, even lack basic identification or other supporting documents necessary to open an account or to obtain a loan. Blockchain solutions for providing identification to displaced individuals have gained attention in the past year. Blockchain provides a means for individuals to create and manage their identities, giving access to parts of their identification to various stakeholders as required, such as banks and insurance companies.
Everex, a Singapore-based financial technology company applying blockchain solutions to cross-border payments (e.g. remittances), trading (e.g. merchant payments) and microlending in any fiat currency, helps create decentralized, global credit histories and scores for underserved individuals and SMEs in Asia and globally.
Blockchain helps lower default rates
Blockchain can increase accountability since it establishes ownership for the loaned funds, reducing disputes over the origin of loans and the payment conditions. In addition, blockchain ecosystems can provide incentives to borrowers to pay on time and even improve their financial habits.
With improved reporting, transparency, proof of origin for loans, and smart contracts streamlining transactions, as well as additional forms of collateral, blockchain is providing lenders with ways to lower risks, which in turn reduces financing costs and increases loan supply.
WeTrust, a California-based company and a financial system that leverages existing social capital and trust networks, has eliminated the need for a “trusted third party” with the aim to lower fees, improve incentive structures and decentralize risks. WeTrust aims to provide decentralized financial services and create a more inclusive financial system which allows anyone to access fair, equitable financial services without an expensive third party.
Conclusion
While blockchain lending fundamentally builds on the ubiquitous peer-to-peer model, it improves considerably on the classic model. With blockchain, the entire lending process can be far more seamless, with much less time and effort involved. For traditional lenders, blockchain offers the tantalizing possibility of lowering risks and associated financing costs while streamlining the lending process. The concept is proving itself as companies all over the world continue to launch projects built on blockchain to provide cross-border lending solutions for individuals and companies, to help individuals create credit histories and gain access to financial services, as well as to use cryptocurrency holdings as loan collateral. With many global economies currently experiencing high default rates and financial instability due to mishandling risky financial products, blockchain offers an opportunity to add a layer of transparency and stability to the volatile global market.