Blockchain: Building blocks
Blockchain is the latest trend in the fintech community, attracting hundreds of millions of dollars in new investment. Is the peer-to-peer lending sector missing a trick?
In the vast and diverse world of fintech, innovations come and go. But a few ideas manage to break through into the mainstream, changing entire industries and solving consumer problems. One of the best-known fintech winners is, of course, peer-to-peer lending. But 2017 is already shaping up to be the year of blockchain.
From the US to China, blockchain start-ups are receiving millions of dollars in investment from some of the world’s leading financial institutions. Earlier this year, JPMorgan and Goldman Sachs pledged $18m (£14.5m) in funding for New York-based blockchain infrastructure start-up Axoni. Just a few weeks later, Credit China Fintech Holdings announced a $30m joint venture with blockchain infrastructure provider BitFury Group in a bid to develop the new technology in China.
In fact, JPMorgan and Goldman Sachs have been investing heavily in blockchain over the past year. Last February, the two firms announced a $60m investment into Digital Asset Holdings (DAH), a blockchain distribution platform founded by former JPMorgan executive Blythe Masters. It is also worth noting that DAH was seeded in 2015 with $50m from investors including JPMorgan, Citigroup, Deutsche Boerse and the Depository Trust & Clearing Corporation (Wall Street’s book-keeper).
A recent study by Juniper Research has estimated that an impressive $290m was invested in Bitcoin and blockchain start-ups globally in the first six months of 2016, and 2017 is already off to a roaring start.
A cautious approach
However, while banks and investors are racing to be a part of the blockchain revolution, P2P lenders are holding back.
“P2P has enough innovation and I believe there are no benefits currently from using blockchain technology in the sector,” says Chris Hancock, founder and chief executive of Crowd2Fund.
“With blockchain as a concept, one main benefit I can see is for the Bank of England to use it to track interbank transfers and introduce a degree of transparency and efficiency to this area of the financial infrastructure. There may be many other potential benefits from Blockchain but they are too far off and would need a significant shift from today’s banking systems in my opinion.”
The idea of offering transparency and tracking technology to their customers may seem innovative to investment banks and retail banking groups, but it is nothing new for P2P lenders. After all, the P2P sector has been built around the demand for greater transparency and straightforward transactions.
Although it has been around since 2009, the vast potential of blockchain technology is still being unlocked and it may still prove useful to P2P platforms.
Automated P2P investment service Lending Robot prides itself on being the first P2P lender to embrace blockchain and uses the technology to allow clients to diversify their investments across a number of different P2P platforms.
“Unlike a traditional hedge fund, we want to be completely transparent,” says Emmanuel Marot, founder and CEO of the Seattle-based firm. “So we disclose to our clients every detail of every single note we invested in.
“Blockchain comes on top of that, as a way to stamp our ledger and prove that we did not tamper with them. Being scalable, reliable and cheap is what makes it appropriate in our case.”
However, Marot concedes that while it makes sense within his business model, blockchain “still has few real-world needs.”
This is a sentiment which is echoed across the industry.
“As blockchain become a more mainstream part of financing it will then have benefits and opportunities for P2P, but does it answer a real problem in the P2P space at the moment? Maybe not,” says Richard Cohen, senior associate at law firm Allen & Overy. “Perhaps that’s why there hasn’t been a big rush thus far.
“It’s not that there are necessarily a lot of barriers to it but it’s early days and there’s a lot of things that need to be done. For entities like P2P that are relatively new, they don’t want to do something that will put them on the wrong side of the regulator.”
Regulatory concerns are very real for the UK’s P2P sector, as many platforms are still awaiting full authorisation from the Financial Conduct Authority. This has led many lenders to take a cautious approach towards any operational changes.
However, when it comes to blockchain, this caution may be misplaced.
“Most of the regulators that we have spoken to are at least supportive of people using Digital Ledger Technology (DLT) and we haven’t come across any regulator who is actually blocking it,” says Wei Keat Ng, global chief operating officer of digital ledger services at KPMG. “As a minimum, most regulators are keenly observing developments, as they’re interested in the efficiencies of the system.”
“Blockchain is not regulated yet,” adds Cohen. “While there is a certain amount of thinking that needs to be done around some of the legal implications our sense is that these can be managed.”
Indeed, a number of P2P lenders told Peer to Peer Finance News that they were holding off on blockchain not because they worried about regulatory repercussions, but because they simply couldn’t see how it would add value to their business.
Blockchain is still relatively new and the scarcity of blockchain infrastructure and distribution specialists means that any foray into this world is bound to be expensive. London-based consortium R3 is attempting to address this by creating its own blockchain hub, but there is still a way to go – last December, R3 downgraded its fundraising expectations from $200m to $150m. And UK-based P2P lenders are not exactly tripping over themselves to implement the technology.
“Maybe with global alignment of fintech regulation and a multi-government initiative, P2P could utilise blockchain to reduce money laundering risk and improve know your client processes,” says Hancock. “However, with the current status quo, it would introduce more unnecessary risk and complexity.”
Banks take the lead
In the meantime, it may be down to the traditional banks to take the lead on blockchain’s evolution. Barclays has its own blockchain division and in September 2016 it conducted its first trade finance deal using the technology. Around the same time, Standard Chartered completed its first cross-border blockchain payment. Meanwhile, KPMG has recently launched its own blockchain laboratories in Frankfurt in collaboration with software giant Microsoft and global brands such as IBM and MasterCard have started funding their own blockchain experiments.
It seems that many of blockchain’s benefits are still being realised.
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“When you think of DLT as an architecture then the benefits become a lot clearer,” says Ng. “DLT offers a whole range of benefits congruent with goals of modern organisation like near real-time processing, security, immutability and trust just to name a few.
“If you think about traditional architecture, different participants keep their own records because
they don’t necessarily trust other counterparties to maintain the transaction records for them, and
there is typically also a need for a central trusted counterparty.
“With blockchain architecture you get rid of the need for a trusted counterparty because everyone has a single version of the truth.”
Opportunities for the future
When it comes to its use in the P2P sector, Cohen speculates that blockchain could be useful in monitoring payment flow within the larger platforms, or between a number of P2P lenders.
“I think it represents an opportunity,” he says. “The investment banks are investing heavily in it – it’s an area that they’re really taking notice of. They will look at applying it to areas where they have a particular need, such as securities issuances, derivatives trading and trade finance.”
As it stands, blockchain technology would only really be worth considering in large-scale transactions such as securitisations, which are still a relatively new phenomenon in the P2P sector. However, as the P2P market grows, the benefits of blockchain may become more and more apparent.
“Ultimately, I hope we’ll have a blockchain-based market, like an open stock market, that will allow us to trade publicly any kind of alternative assets,” says Marot. “Maybe someday…”