Michael Lloyd explores the untapped potential of blockchain and cryptocurrency assets for the peer-to-peer lending sector…
Blockchain and cryptocurrency are thrilling concepts that have the potential to pave the way for the future of financial services, including peer-to-peer lending, but all too often get confused. As a result, widespread adoption of the technologies is still slow.
If you’ve been paying attention to pop culture, you will understand why. In the American TV series StartUp, a gangster, a hacker and a banker collaborate to create a criminal’s dream version of a cryptocurrency. However, at various points in the show, the characters appear unsure about what it is they actually do, alternately describing their business as pure cryptocurrency and other times as crypto-backed lending or a payment services provider.
The recent rush on Bitcoin and altcoins tapped into the ‘get rich quick’ mentality of most retail investors, while self-proclaimed crypto leaders such as Elon Musk have done their part to spread speculation about the value of crypto assets, without actually clarifying the difference between crypto coins, tokens, and blockchain technology.
As a result, blockchain technology and cryptocurrency often get lumped together and misrepresented.
Blockchain is an online, immutable ledger system which records every transaction across several computers that are linked in a peer-to-peer network.
Crypto coins such as Bitcoin are digital currencies in which transactions are verified and records are maintained by a decentralised system. This system is often underpinned by blockchain technology.
Both crypto and blockchain have many uses and huge potential – blockchain technology can remove the need for third parties such as accountants, or reduce their time and costs. It can also be used to power P2P platforms’ secondary markets cheaply and more efficiently.
Ablrate uses blockchain-backed ASMX for just this, to settle trades instantly and more efficiently on its secondary market without expensive legal settlements. It plans to connect ASMX with other P2P platforms to improve liquidity in the P2P sector at large.
“Blockchain is an immutable ledger with no fraud or duplication that can’t be hacked and just replaces that trusted third party,” says David Bradley-Ward, chief executive of both Ablrate and ASMX.
“It’s the ledger that’s updated by consensus – it’s a bit like triple entry bookkeeping.
“Once you take out the third-party intermediaries, such as accountants, auditors, lawyers to a certain extent, everything can become more efficient, cheaper and more transparent, that’s the exciting thing about it.”
Bradley-Ward says that blockchain has the potential to improve the process of identity management by having know your customer (KYC) and anti-money laundering (AML) information publicly available to look at on a blockchain that can’t be hacked.
“Blockchain is the next level of the internet,” he says.
“Everyone will say it’s a fad like they did originally with the internet. When I talk about blockchain to people right now it’s the same reaction unless they understand it. People that don’t understand it rope it in with Bitcoin and say it’s a scam and that’s nonsense. It’s very much the Blockbuster-Netflix story.
“There’s no doubt in my mind that blockchain will utterly change the world.”
Haydn Jones, director and senior blockchain market specialist at PwC, says blockchain presents many uses, such as underpinning decentralised finance, stablecoins and potentially the Bank of England’s central bank digital currency, as well as identity credentials, provenance, contracts and for engaging people.
He says blockchain could have huge potential for P2P via powering smart contracts whereby trust is enforced between lenders and the borrower.
A platform can look at the credit risk scoring or the risk the borrower might be taking and the nature of the credit profile, and lock in specific targets through a smart contract. If these are met, the cash is released and there are rewards for the borrower such as an uptick in salary and additional funds. If it is missed, actions are taken, such as withholding an amount of cash.
“I would argue blockchain can sit at the core of the new generation of P2P models,” says Jones.
“It has all of that capability. I can create a programme which defines a relationship in P2P and run smart contracts so everyone knows what they’re supposed to do.
“It’s about the programable nature of the way in which you manage the risk dynamic between stakeholders.”
Moving onto cryptocurrency, JustUs’s sister company Moneybrain has its own cryptocurrency – BiPs – which generates returns for investors through its exposure to different asset classes.
The platform has just started accepting deposits of Bitcoin in exchange for the value of a loan they want in BiPs through transactions that take less than a minute. It also has plans to start P2P lending BiPs.
Founder of JustUs and Moneybrain Lee Birkett predicts that more platforms will adopt blockchain and cryptocurrency, particularly with the Bank of England consulting on a centralised digital currency.
“P2P is happening on crypto – that’s what decentralised finance is, people lending to other people with crypto as the currency,” he says.
“And it’ll be safer and better with the Bank of England digital currency. At the moment you need to cash out on the bank which takes days, while with a digital pound it will be immediate.
“In 10 years’ time you won’t know the world without blockchain and internet money.”
Katharine Wooller, UK managing director at crypto wealth platform Dacxi, which is applying for its own crowdfunding permissions, says crypto investors are a perfect fit for P2P as they are forward thinking and accepting of new technologies. As a tech-driven industry, P2P should find this easier than most traditional finance businesses to use.
Wooller believes that retail investors in the UK are increasingly purchasing cryptocurrencies as a means of diversification, and to hedge against inflation. However, there is increasing institutional adoption from various banks, asset managers and hedge funds which now see digital assets as a genuine asset class.
She predicts cryptocurrencies will in the near future be integrated into the current financial infrastructure and therefore should open up a substantially larger global audience to P2P, free of currency constraints.
“I would expect to see more platforms embracing blockchain and crypto; as a technology it is coming towards all financial subcategories with huge speed and in my opinion is unstoppable,” Woller says.
“Compliance-wise it must be conceded this will be a significant overhead in the future as global regulators are getting more involved with crypto, to the obvious benefit of retail investors.”
However, despite the forecasts, take-up of blockchain and cryptocurrency has still been slow in the P2P sector to date.
Some platform owners and industry stakeholders predict that blockchain could become integrated into financial services, while crypto’s place in P2P may mainly lie in accepting payments.
“Cryptocurrency in P2P lending will remain a small part of the market, although it wouldn’t surprise me if some platforms allow investors to pay for loans in cryptocurrency, even if the loans themselves are in sterling,” says Neil Faulkner, managing director of P2P analysis firm 4th Way.
Speaking at July’s P2P Investing Summit, a virtual event hosted by Peer2Peer Finance News and AngelNews, Shojin Property Partners chief executive Jatin Ondhia said that blockchain will eventually be used to underpin platforms.
However, he said that there’s no need to rush in and be pioneers because the Financial Conduct Authority (FCA) bundles this area in together with cryptocurrencies, and mentioning cryptocurrencies in an application causes them to panic.
“And what if we accept Bitcoin and immediately convert it into money, that’s more marketing and sales, not underlying fundamentals?” Ondhia added.
Bradley-Ward says that Ablrate will probably accept stablecoins at some point and believes there is a “good market for that”.
He says platforms will likely implement blockchain, perhaps in order to accept stablecoins or to plug into a different business, but the FCA will crack down on cryptocurrencies, as evidenced by the regulator banning one of the largest cryptocurrency exchanges, Binance, from operating in the UK.
“Platforms would be mental if they don’t use blockchain,” says Bradley-Ward.
“But crypto will be relegated to the point you can’t do anything with it.”
Atuksha Poonwassie, co-founder and managing director of Simple Crowdfunding, sees the benefits of blockchain but will not look at cryptocurrencies until regulators provide a clearer direction.
“Blockchain makes a lot of sense, it’s just finding the best way to utilise it moving forward,” she says.
“I absolutely see the benefits, it’s a number of things, the secondary market could be one of the applications but also information management, raising money for projects and other things.”
However, despite the enthusiasm of some, the majority of platforms are reticent about implementing blockchain or cryptocurrency just yet, giving reasons such as they are focusing on P2P, it’s not their priority or the demand isn’t there.
“At the moment builders aren’t crying out for loans in crypto for building houses,” says Matt Thorbes, finance director at Invest & Fund.
“Until that changes, from our perspective the demand isn’t there.”
Filip Karadaghi, managing director of LandlordInvest, says he does not see how blockchain or cryptocurrency can create value for the products the platform offers.
“Essentially it would be very different, and we wouldn’t see any value in using them,” he says.
“Property lending and crypto does not go well together, it’s a speculative tool essentially and property lending is much less so.”
Blockchain and cryptocurrency have so much potential, but it is not surprising that P2P platforms want to wait a while before going all-in on this next frontier of technology. However, if used correctly, decentralised finance will have a huge role to play in the future of fintech lending. Perhaps then we will get a better representation of this exciting space on our TV channels and social media feeds.