Disrupting the disruptors
Cryptocurrencies are not only the hot topic de jour – they are also edging into the peer-to-peer lending space. Peer2Peer Finance News investigates what this means for an industry still finding its feet in mainstream finance…
CRYPTOCURRENCIES and peer-to-peer lending have one big theme in common: they look to bypass the intermediary. But does that make these two areas of fintech the best of bedfellows?
Cryptocurrencies have become a dinner party conversation after one of the earliest forms, Bitcoin, saw its value hit record highs of nearly $20,000 (£14,221) at the end of 2017. The price has since dropped below $10,000, highlighting the volatility of cryptocurrencies, but aside from the currency, backers say much of the value is in the underlying blockchain technology.
The blockchain allows transactions to be recorded online and transacted faster than with traditional banking networks. A digital currency controlled by the people and faster payments unconnected to central banks does have a resemblance to P2P lending, and there are some platforms combining the two.
Many are using initial coin offerings (ICO), a form of fundraising, to create a digital currency for use on a dedicated P2P platform to fund loans or pay fees. Borrowers are also able to post other digital currencies as collateral on some of the crypto-P2P platforms.
This approach to P2P lending has been met with mixed success. Finland-based ETHLend launched at the end of last year and has already lent more than £2m. The platform lets investors fund business and personal loans worldwide using the Ethereum blockchain. It launched with an ICO last November, creating LEND tokens that can be used on the website to pay transaction fees. Similarly, London-based Nebeus raised £4m in an ICO last year and has facilitated more than £7m of crypto-backed loans.
And there are other P2P investment platforms following suit. Lingerie tycoon Baroness Michelle Mone has teamed up with her venture capitalist partner Doug Barrowman to launch an investment platform powered by its own dedicated cryptocurrency called EQUI. Investors will be able to use EQUItokens to acquire stakes in or lend to early-stage businesses through the platform, which launched a public ICO last month. And London-based Lendingblock is looking to raise £7m for an LND token on a P2P platform that will let individuals lend in a range of digital currencies such as Bitcoin, Ethereum and Ripple.
However, there is no guarantee of success with a crypto-P2P ICO. Sikoba, founded by Luxembourg-based financial consultant and researcher Aleksander Kampa, last year offered Ethereum tokens in return for a P2P IOU, extending lines of credit to users who know each other around the world. But after failing to raise the minimum 5,500ETH needed, it has said it will refocus the project.
Even if the platforms launch, there can still be hurdles ahead. The risks of cryptocurrencies were highlighted last May when the world’s first Bitcoin P2P lending platform BTCJam, backed by Funding Circle investor Ribbit Capital, announced it was closing after five years. It cited regulatory challenges and the difficulties of introducing the technology in the poorer developing nations it was trying to help. But analysts insist BTCJam was just unlucky with its timing and the lack of coherent policy over cryptocurrencies.
“With jurisdictions increasingly making their approach to cryptocurrency clearer, the worldwide trend now appears to be moving towards recognising cryptocurrency as a legitimate and appropriately regulated asset class,” Marc Piano, of law firm Fox Williams, explains. “If this trend continues, the challenges, costs and uncertainty surrounding crypto-backed financial services will become more manageable and compliance will become easier.
“This in turn may lead to the launch of a plethora of crypto-backed P2P platforms and the continued operation of existing platforms, although such existing platforms may need to adjust their business models to ensure full compliance with the new regulatory landscape.”
For now there is little sign of the big P2P brands such as Zopa, RateSetter or Funding Circle showing much interest in cryptocurrency and many of the crypto-P2P platforms are set up solely for lending using the blockchain and dedicated specific currencies.
One platform has bucked this trend though. P2P bonds provider Crowd for Angels is looking to raise up to £50m for a Liquid Crypto Bond that will pay investors three per cent over five years. Investors will also receive cryptocurrency tokens through an ICO that can be traded on external exchanges or used to invest in further projects on the Crowd for Angels website.
P2P investor BondMason has also seen the benefits of cryptocurrencies and its founder has backed the creation of a digital coin called ARC that can provide a digital currency for those living in areas with high inflation or under-developed banking systems. So what are these firms seeing that others in the sector are not?
BondMason chief executive Stephen Findlay says crypto-P2P could have a role in developing countries where traditional or fiat money is less suitable, for reasons such as high inflation or a poor banking system, as long as the digital currency is stable. Crowd for Angels agrees with this approach.
“Broadly, P2P lending using cryptocurrencies offers all the advantages of the blockchain, with potentially higher returns for investors,” a spokesperson explains. “Additionally, cryptocurrencies are independent of banks so they run on lower costs, which can be passed onto investors/borrowers in the form of lower fees.
“With much of the world’s population not having access to a bank account we also see huge potential for growth in crypto-backed P2P in those countries with poor banking infrastructure – crypto loans do not require a bank account.
“Cryptocurrencies help to facilitate global lending, giving investors the opportunity to diversify around the world, with borrowers having access to a larger pool of lenders.”
Other benefits include giving existing crypto investors an alternative form of income as well as a tradeable token, as Karen Butler of law firm Reed Smith explains.
“One benefit of using cryptocurrencies is an increased universe of potential lenders; another is that those who have benefitted from speculation in cryptocurrencies may be more inclined to lend into a P2P platform as it’s not ‘earned money’, and P2P lending may be perceived as a safer investment than continued speculation,” Butler explains. “If a platform accepts cryptocurrencies then it saves itself the work of changing cryptocurrencies back into fiat currencies.”
Many of the benefits are on the borrower side though, such as getting funds faster in cases where they may not usually be able to obtain finance. But there are of course also risks due to the volatility of cryptocurrencies.
“If a company needs £100,000 in order to buy a new factory and they want to use P2P funding, at the end of the process they will have £100,000 cash to buy the warehouse,” Thomas Hulme, solicitor at Mackrell Turner Garrett, explains. “If this was done using cryptocurrencies and the peers were funding the business by giving them cryptocurrencies, because of the volatility of the price of cryptocurrencies and the fact that the price actually changes on a day to day basis, unlike the pound, the business receiving the funds may receive £110,000 or £90,000.
“This poses a risk to the company obtaining the debt finance as if they choose to borrow £100,000, they may only be able to get £90,000.
“This is a fundamental issue of cryptocurrencies that they are viewed as a currency, but they act more like a share or commodity.”
With both crypto and P2P sectors plagued by their own critics, could the volatility of digital currencies harm the P2P space? Piano warns there are already “negative optics” associated with cryptocurrencies due to high-profile security incidents, regulatory intervention, civil action and instances of fraud, which could taint traditional P2P lending if crypto-P2P platforms become used more widely.
“This negative association certainly adds to the pressures of an industry which is seeking to distance itself from and offset recent negative publicity,” he warns. “However, as cryptocurrency continues to gain acceptance as a legitimate asset class, this will help reduce some of the negative optics which may currently surround cryptocurrency in general.
“One of the striking features of cryptocurrency is its resilience, recovering from crashes of 60 per cent or more in some cases as well as increases in value which outperform most known asset classes.
“While this volatility can be unattractive for some investors, it can be attractive for those with a high appetite for risk and who are looking to diversify their portfolio, which may already include traditional P2P loans.”
Piano adds that while crypto-backed P2P lending may lead to further scepticism towards P2P lending in general, traditional P2P lenders that choose not to offer crypto-backed P2P lending services can emphasise their fiat-only offering, established history and regulatory compliance to separate themselves from crypto-backed P2P lenders.
The creation of a dedicated digital currency is just one side of the development of crypto-P2P, and one area that traditional lenders may flock to is the blockchain.
“The use of blockchain technology can reduce friction in the credit process, leading to loans being granted faster and with lower fees than would otherwise be possible through traditional institutional or P2P lending channels,” Piano adds.
This is a view backed by Iain Niblock, chief executive and co-founder of P2P analysis firm Orca Money, who says P2P is more likely to adopt the blockchain than the beans.
“A technology-based industry such as P2P lending is likely to adopt blockchain technology before traditional financial services firms,” he says. “P2P lending can benefit from the growth of cryptocurrencies.
“Both are alternatives and both have captured an audience of retail investors. For those who have made significant gains from cryptocurrencies in 2017 there is an opportunity to invest some of the profits in more stable, predictable investments such as P2P.”
Read more: Cryptocurrency providers eye P2P lending
It is not just P2P platforms, investors and borrowers that have shown an interest in cryptocurrencies. The Financial Conduct Authority has expressed concerns about ICOs and MPs have launched an inquiry into digital currencies and the blockchain. Piano suggests this review could be positive.
“A bullish view is that, rather than jeopardising crypto-backed P2P platforms in the UK, this inquiry could provide much-needed certainty and clarification,” he explains. “The UK parliament and government appears to be taking an openminded and balanced approach to its exploration of distributed ledgers and virtual currencies, which may result in thoughtful legislation and regulation together with a prudential approach to oversight, recognising that distributed ledger technology and virtual currencies may offer significant benefits not previously conceivable, while its risks can be mitigated if approached carefully.”
He says the end result could be that virtual currencies are recognised and treated as a legitimate asset class which could lead to greater investment into and development of crypto-backed P2P platforms.
Crypto-P2P is still a pretty new industry but with increased regulatory and political focus as well as some mainstream players acknowledging the benefits of the blockchain, its future may be resolved sooner than you think.
This feature appeared in the April issue of Peer2Peer Finance News, now available to read online.