Blockchain has been touted as the technology set to transform financial services as we know it – but could it do the same for peer-to-peer lending? Andrew Saunders investigates
GIVEN THAT ITS MOST famous – or infamous – application is as the technology underpinning wildly fluctuating cryptocurrencies such as Bitcoin, Litecoin and Ripple, perhaps it is not surprising that the blockchain has taken quite a while to start making inroads into the comparatively sober world of peer-to-peer lending.
After all, it’s tough enough for platforms to persuade investors to put their hard-earned money into what is still a relatively novel market, without also having to explain the inevitable associations of high-stakes gambling that accompany any mention of blockchain technology.
But image problems aside, the technology does have its appeal for both investors and borrowers, promising a new generation of faster, cheaper and more efficient services – in theory at least. The number of platforms which are either using or looking into blockchain technology is on the rise – even if overcoming that whiff of the Wild West in investors’ minds is one of the first hurdles they face.
“The problem is that the vast majority of people think that Bitcoin is the blockchain and the blockchain is Bitcoin,” says David Bradley-Ward, founder of Ablrate, an asset-backed lending platform which has developed a blockchainpowered secondary market in partnership with tech provider ASMX. “But that’s like saying that Google is the internet – it’s not, it’s just something on the internet, like Bitcoin is just something on the blockchain.
“When I make a presentation the first thing I say is that we operate on the blockchain for a reason. We’re not issuing a token, we’re not Bitcoin and we don’t have any cryptocurrency.”
For Bradley-Ward, that reason is that the blockchain is good for competition, enabling multiple smaller platforms to get together and behave like one big lender, writing loans that they would not be able to fund alone. “Very soon I can see a time when the same deal will be on several platforms – it will be a £2m deal and each platform will have £500,000 of it,” Bradley-Ward predicts. “That’s going to be the trajectory in my opinion.”
He believes the technology will eventually be used for primary loan origination too, but is initially best suited to the secondary market, where liquidity – the ability for lenders to sell loans before they mature – is at a premium. Ablrate’s tie-up with ASMX will provide a collaborative secondary market for P2P platforms and has already signed up Huddle Capital and The House Crowd.
The central feature of all blockchain platforms is that they provide a distributed secure and immutable record of transactions and they do it entirely automatically. “The challenge is always going to be the issues that arise between platforms,” says Bradley-Ward. “Whose ledger is the proper ledger? The blockchain provides an immutable and perfectly trusted ledger between all the parties on a network. No-one can faff about with it and people can buy and sell loans on different platforms knowing that a proper ledger is being held.”
If it’s been a slow burn for B2B non-crypto blockchain applications, it will be even slower for consumer ones, says Tyler Welmans, UK lead at Deloitte’s blockchain lab. That’s because the level of regulation that applies to retail products mean that the technology is not a simple plug-and-play option. “The reality is that it will take time,” he asserts. “Digital ID is the foundation for many blockchain platforms. At the regulated end of the spectrum we can’t start enabling consumers to hold or trade digital assets in their accounts until we know exactly who they are. If you are talking about a big global insurer or a major bank getting involved in this technology, there is a big overhead of compliance.”
But once the foundations are in place, he thinks there is potential for the blockchain to live up to its hype as a transformative solution. “We will see unbundling of what banks and financial service providers do, analogous to what happened with the telecoms providers 15 years ago,” he adds.
For example, getting new customers onto a lending platform will be substantially quicker and cheaper to do in a world where everyone already has a pre-verified digital ID. “The indications are that the blockchain could well end up changing the way that consumers think about and access financial services, and the sort of organisations they look to as providers,” says Welmans.
Another blockchain-related development that has been heralded as opening up the market for financial services applications is tokenisation. In its simplest form, a blockchain token is a digitalised representation of something that has value – an asset, shares in a company or a financial instrument for example. The token enables that value to be traded electronically on a blockchain exchange.
In theory, just about anything can be tokenised, but the practical and legal realities of doing so can be substantial, as Radko Albrecht, founder of Berlin-based small- and medium-sized enterprise (SME) lender Bitbond, explains. Bitbond – which uses the Stellar blockchain for payments processing to facilitate faster and cheaper cross border lending – has just made German financial history, raising $2.3m (£1.9m) in July via the first ever securitised token offering (STO) to be approved by the country’s financial regulator, BaFin.
“The legal challenges were way bigger than the technological ones,” he says. “We wanted to go to the capital markets to diversify our refinancing, so we thought why not do a bond offering which from a business perspective is a normal bond offering, but from a technology standpoint the ownership is represented by a digital token rather than by a conventional paper certificate?”
It was easier said than done – having developed a complex and expensive legal concept for the trading of a digital security, it took several more months of back and forth with BaFin before the prospectus for the BB1 token was approved in January this year. Albrecht says they only found out afterwards that their proposal was the only one approved out of 130 similar applications.
The bond is an auto-diversified product aimed at smaller retail investors. Investors from 87 countries were invited to take part in the issue, and Bitbond’s existing loans platform is now open only to institutional investors.
It sounds complicated, and it is, admits Albrecht. But now other platforms are keen to use Bitbond’s STO model, so the firm is planning to start white labelling its tokenised asset technology alongside issuing more of its own bonds. “We are already working with a real estate platform that will go live in four to six weeks – all the investments on it will be tokenised,” says Albrecht. “I believe we will see a lot more assets being tokenised.”
Chris Hancock of Crowd2Fund also sees a bright future in the blockchain – his new business FinBlocks aims to tackle the problem of identity fraud online. The idea was born out of the need for better fraud protection, AML and ID services online. “We thought there must be a better way,” says Hancock. “And there wasn’t much competition that we could identify.”
FinBlocks is a blockchain-powered payments processing platform which can be used by lending businesses to provide cheap, automated and above all, secure payments services. “The FinBlocks system securely holds client funds in a regulated way and means that a marketplace business doesn’t have to build that capability themselves,” Hancock explains. “They can outsource it to us so they can focus on serving their customers.”
Having tested the concept on the Crowd2Fund platform, FinBlocks was launched as a standalone business last month. Hancock says that concerns over the viability of cryptocurrency should not obscure the value of the blockchain itself. “I am still very sceptical about cryptocurrencies, but what I do believe in is the engineering methodology of the blockchain, and we have to be very clear about the differences,” he explains. “The blockchain can increase security, and it is much more auditable [than existing ledger technology]. You can go back and see what the status of the data was at any given point in time.”
For Martins Liberts, founder of Lithuania-based Debitum Network, the theoretical value of the blockchain to lenders is currently hampered by a lack of affordable and lender-specific blockchain platforms. Like Bitbond, Debitum is a crossborder SME lender, but it currently uses the Ethereum blockchain to process payments, which he says has turned out to be too costly. “It is so expensive to do every small transaction on the blockchain – we do some but have not fully implemented it,” says Liberts. “The commission can be up to a dollar on a $10 transaction – that’s useless. Even 50 cents is no good.”
The search is on for a more suitable platform, says Liberts, but Debitum’s approach – which includes an innovative standard risk assessment score for borrowers in different countries – remains blockchain inspired. “We follow the decentralised philosophy – we don’t believe that the company should control every step of the process, or that it can be the best at everything,” he states.
Despite these teething troubles he believes that the blockchain’s advantage will be realised in the long run. “It’s new technology and there is a lot of experimentation, but I expect the blockchain to keep growing,” he says. “There is a lot of money in Asia and many small businesses in Europe, and it can make international transactions cheaper and faster.
“If you want to be one of the first you have to be there moving it forward. That’s what we are trying to do.”
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