Why cryptocurrencies are set to disrupt P2P lending
Richard Gill, compliance officer at business crowdfunding platform Crowd for Angels, explains why regulation of the cryptocurrency sector will benefit investors and peer-to-peer lenders alike
Over the past few months the crowdfunding/peer-to-peer lending industry has seen yet another wave of disruption, with cryptocurrencies and blockchain technology becoming increasingly integrated within its operations. While the crypto industry has seen some bad press over the past few months, the multitude of benefits offered by these decentralised technologies means that, in our view. alternative currencies are here to stay. Cryptocurrencies as an investment remain largely unregulated but moves towards regulation suggest they could one day, in the not-too-distant future, become established as another retail-friendly asset class.
For those not familiar, cryptocurrency is a form of money which is dealt with on a digital-only basis. The first cryptocurrency ever made was Bitcoin, created by a group of unknown individuals in 2009 under the mysterious name of Satoshi Nakamoto. Since then the market has exploded, with 1,565 different cryptocurrencies currently listed on industry data website Coinmarketcap.com.
One of the key aspects of cryptocurrencies is that transactions work without the need for a central or single administrator. Instead, cryptocurrencies use a decentralised or peer-to-peer system for their settlement, with transactions taking place directly between users, without an intermediary such as a bank. These transactions are verified by network ‘nodes’ and recorded in a public distributed ledger known as a blockchain – a record of all transactions which is updated and readable by anyone. As a result they have much faster settlement times compared to centralised systems.
Taking advantage of growth in the industry, a variety of crypto-backed P2P platforms are now being launched. These allow owners of cryptocurrency to use their holdings to borrow cash while retaining the right to their currency. They also offer investors/lenders the ability to make a high (but risky) return. Some crowdfunding/P2P companies have also launched their own Initial Coin Offerings (ICOs), a fundraising event which sees cash or cryptocurrency raised in exchange for digital tokens.
However, one of the key issues for investment crowdfunding and P2P firms is the distinct lack of regulation within the crypto industry and uncertainties over how the financial authorities will ultimately react. In the UK, cryptocurrencies and digital tokens are currently not currently classed as an investment by the Financial Conduct Authority (FCA), so do not come under the regulatory regime.
Given their increased popularity with investors, the FCA in September last year warned about the risks associated with investing in cryptocurrencies, noting in particular the potential for capital loss and fraud. The sharp rise in the value of several cryptocurrencies in 2018, combined with a significant rise in ICOs, saw a huge influx of retail investors into the market. With a remit to protect consumers, the FCA clearly has its concerns, especially considering the sharp fall back in the value of many cryptocurrencies after their sudden rise. Other regulatory bodies around the world have also reacted to various degrees, with the Korean and Chinese authorities banning ICOs last year.
In our opinion, it does seem that, ultimately, cryptocurrencies will eventually become regulated as per other investments (such as shares) and not go down the often proposed route of self regulation. There is already evidence of this, with Bank of England Governor Mark Carney saying in a recent speech that “the time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system”.
Additionally, the Gibraltar authorities are leading the way by implementing the world’s first regulations for initial coin offerings, with a bill expected to be considered by Parliament in the second quarter 2018. Akin to the London Stock Exchange rules for quoted companies, Gibraltar is expected to introduce the concept of regulating authorised ICO ‘sponsors’ who will be responsible for assuring compliance with disclosure and financial crime rules.
We believe that regulation is both inevitable and welcome. While retail investors have mainly entered the market looking for huge potential crypto gains they need to be protected from fraud and have trust in the assets they are putting their money into, as well as the financial intermediaries promoting them.
Another way investors can take part in the crypto markets is via a unique offering from crowdfunding business Crowd for Angels. The FCA-regulated crowdfunding platform, which has been operating since 2014, has recently launched a Liquid Crypto Bond with attached ICO of its ANGEL tokens. Investors in the bond, which is eligible for inclusion in the tax-efficient Innovative Finance ISA, will receive four per cent interest per annum for five years, with capital returned at maturity.
For every £1 invested, bond holders will also receive up to 99 free ANGEL tokens, a form of cryptocurrency which will be able to be traded on external exchanges. With the tokens being issued at no additional cost they provide the potential for capital gains and may be attractive for investors looking to make an initial venture into the cryptocurrency market.