This Weeks Headlines:
Crypto Lenders Eye P2P, Small Loans Market Share
The global financial crisis led to a massive distrust in financial institutions, and increasingly, people requiring credit veered towards the online Peer-to-Peer (P2P) lending industry. The opportunity hasn’t been lost on new players entering the market, that is estimated could reach $290Bn in just a few years, utilizing the Blockchain and Cryptocurrencies. Diar speaks to their CEOs.
Credit on the Blockchain could be provided to the underbanked and the unbanked, which would drive growth in emerging markets and developing countries. The World Bank estimates two billion people worldwide are still unbanked and many more are underbanked. Borrowing money from a bank can be a lengthy and an expensive process.
According to Alex Mashinsky, CEO of Celsius, a crypto lending start-up, “Blockchain represents the first real opportunity to disrupt the banks and give people a chance to join the middle class. The internet disrupted almost every industry but not banks. The Blockchain needs the next 100Mn people to adopt it to make these P2P platforms viable and of scale.”
The market has responded over 10 years ago with the introduction of Peer-to-Peer (P2P) lending companies such as Prosper and LendingClub. LendingClub has granted over 2.5Mn loans worth $31Bn with an average interest rate of 14% since its launch in 2006. P2P loans aim to be faster than traditional brick and mortar banks, non-discriminatory and cheaper with a transparent fee structure for those who might not fit the whistle-clean criteria of a bank. Of course, there is a limit – most of the P2P platforms do not offer unsecured loans over $40,000.
The biggest problem, however, is that the conventional P2P platforms are not decentralized as there is still an intermediary. The funds do not go straight from lender to the borrower in the conventional P2P lending platforms. Instead, they are first transferred to a trust account, which is held by the platform. There are also restrictions on location boundaries and cannot offer interest rates universally. New projects that are leveraging smart contracts are entering the market and raising money through Initial Coin Offerings (ICOs) such as ETHLend, CoinLoan, SALT, Celsius and Lendoit. According to the CEO of Lendoit, “smart contracts are the reason that intermediaries and intermediates are going to disappear from the lending process. For the first time, thanks to the Blockchain, there is no controller that determines the interest rates.”
ETHLend is developing a P2P lending platform based on Ethereum. The first version of the platform has been up and running since May, 2017. The borrower applies for a loan in Ether and can use any ERC-20 compatible tokens as a collateral for a loan. Rapid tokenization of assets means that, in the near future, any asset can be placed as a ERC-20 compatible token, which will represent the asset’s value and thus can be used as a collateral for the loan. The platform allows location unrestricted access to global capital, which should in theory create an interest rate competition and consequently provide rates as determined by the free market. Speaking to Diar, Stani Kulechov, CEO and a founder of ETHLend said "our aim is to democratize interest rates globally and provide more access to finance, with the use of the Ethereum network." The borrowers will be scored by combining the information from decentralized services such as uPort and Bloom alongside other centralized services such as credit scoring institutions and social media profiles. ETHLend will provide a protocol for developers to create bots that use AI and the Ethereum blockchain ledger data combined with ETHLend’s decentralized credit rating data to asses Credit Risk.
CoinLoan is in some ways similar to ETHLend. It is also a startup based in Tallinn, Estonia and it also creates a P2P lending system, which allows anyone to be both a lender and borrower. However, CoinLoan has a different business model. Instead of providing the loans in Ether, the system will allow borrowing and providing loans in fiat currency with a cryptocurrency collateral. The accepted fiat currencies at launch will include USD, EUR, GBP, CNY, JPY, RUB, CHF, PLN, and CZK. CoinLoan will allow using Bitcoin, Ethereum, Litecoin, Dash, ZCash, Ripple as a collateral at launch. The maximum amount of a requested loan can be 70% of the cryptocurrency that is used as a collateral. This requirement guarantees that there is less risk of lending and thus, it is also not necessary to verify the borrower’s solvency, which is normally required by banks. If the value of the collateral drops below the required amount while the loan is still active, the borrower will have to increase the collateral amount or make an advance payment of the loan. For a borrower, it is more logical to temporarily relinquish control of their cryptocurrency instead of selling it on an exchange if they expect that their value will rise. CoinLoan Tokens will be used for paying the fees on the platform.
The most publicized crypto lending project, SALT, is a membership-based loan platform based in Denver, Colorado. SALT will only allow accredited investors to become lenders on the platform. As with CoinLoan, SALT will allow holders of Blockchain assets to leverage their holdings as collateral to borrow fiat currency for low-interest payments. At launch, SALT will only support loans in USD with Bitcoin as collateral but more currencies and Blockchain assets will be supported in the future. The minimum amount for a user to borrow with SALT will be $5,000 while other platforms even allow microloans. The platform does not perform a credit check but is required to conduct Anti-Money Laundering (AML) and Know-Your-Client (KYC) checks. SALT tokens will be used to buy the different tiers of membership, which will provide better conditions for loans and enable larger amounts of available capital. However, it is unclear what the range of interest rates will be on the platform, which will ultimately determine the success of SALT.
Global Peer-to-Peer Lending Set To Grow To $290Bn By 2020 (USD Bn)
Source: Morgan Stanley
The free market people on other platforms will incentivize a more competitive atmosphere but they might not get as much available capital as from accredited investors.
Celsius, a New York based start-up also strives to enter the consumer credit industry with P2P loans on Ethereum. Instead of relying on collateral to get a loan however, Celsius will carefully select both lenders and borrowers and then use machine learning to determine the loan amount and interest rates. It will be possible to get a loan on Celsius without having any assets. The algorithm will use borrower’s social media profiles and online transaction history to determine their reliability. It will also allow borrowers to have a guarantor from anywhere in the world that will vouch for them with some of their digital assets, which will consequently expand borrower’s credit limits and lower their interest rates. Because loans without collateral will increase risk, Celsius is responsible for recovering the debt to lenders and will also provide insurance on defaults, which will cover a portion of the principal loan amount for the lender. While individual lenders provide credit in ether, borrowers will receive the loan in a fiat currency. Celsius’ token Degree is used by both borrower and lender to purchase a membership for the platform.
Israeli startup Lendoit will function much like Celsius. Lendoit, a P2P decentralized platform will not require a collateral. However, on top of lenders and borrowers, the platform also consists of collectors. Borrowers go through a registration process, in which they must pass the AML/KYC checks. Then they fill in a loan tender for which the lenders can bid in a reverse auction where the lowest interest rate wins. Lendoit will be using centralized credit score providers but also announced a partnership with Bloom for score providers mechanism. If the borrower is not paying off the loan properly or if it defaults, the collectors can buy the bad debt to minimize the lender’s losses. The collectors will be authorized to legally act against the borrower. Moreover, Lendoit will also have a secondary market where lenders can offer their loans to other investors. The secondary market will improve the liquidity of the market and will not require as much long-term commitment from the lenders.
There are already established P2P cryptocurrency platforms such as Bitbond and BTCPOP, which do not use smart contracts. Both of these platforms are based on the Bitcoin network. They promise investors returns of up to 13% annually. The installments can be denominated in fiat currencies or Bitcoin but they are all paid in Bitcoin. The problem with Bitcoin loans that are denominated in fiat currencies is that the earned interest must not only match the risk level but also the increasing value of Bitcoin. In 2017, the value of Bitcoin as of writing has already grown by more than 790% while the return from lending Bitcoin would be a maximum of 13%. Thus, Bitcoin denominated loans are more popular for investors but they present similar risks to borrowers. The loans in Bitcoin are usually liquidated to fiat currencies and then must be repaid back in Bitcoin. This year, the Bitcoin borrower would have to repay more than seven times the amount in fiat currencies. The Bitcoin lending platforms have thus not gained much traction with several (BitLendingClub, BTCJam, etc) closing along the way.
The P2P projects that are leveraging smart contracts can potentially remove location restriction of credit provision and thus unify the differences in interest rates. Moreover, they will further decentralize the lending process by eliminating the trust accounts. Smart contracts provide a secure environment without a single point of failure while all of the transactions are transparent for all the market participants to see. The interest rates will be pressured down by the reverse auctions that support competition on the free market. It is safe to assume that the platform that will attract the most lenders and therefore provide the most competitive rates will be most successful. The most promising are the platforms that will not require a collateral and be able to reliably score the borrowers. The scoring process will be the key to a P2P platform without a collateral. If the default rate is too high, the interest rates would be pushed up and the platform would most likely fail.
Blockchain P2P* Lenders
|Project||Revenue Source||Collateral||Borrowing in||Lending in||Loan Range||Interest rates||Method||MVP|
|ETHLend||Fees||ERC-20 tokens||Ether||Ether||No limit||Free market||Reverse Auction||Yes|
|CoinLoan||Fees||BTC ETH LTC DASH XRP ZEC||Fiat||Fiat||$50+||Free market||Reverse Auction||No|
|SALT||Sale of Membership||Bitcoin||USD||USD||$5000+||Offered by Lenders||Offerings||Closed beta|
|Lendoit||Fees/ Commissions||None||ERC-20 tokens||ERC-20 tokens||$100 - $1000||Free market||Reverse Auction||Yes **|
|Celsius||Fee Spread||None.||Fiat or Top 30 Crypto||Fiat or Top 30 Crypto||$0 - $1000. Uncapped Up to 80% with Crypto Collateral||Free market||No|
Central Banks Undecided on Digital Currency Design
Research on a Central Bank Digital Currency (CBDC) have all been asking similar questions – will the public hold accounts with the Central Bank instead of commercial banks? Will the currency earn interest like bank reserves? What are the macroeconomic objectives? Sweden’s Central Bank, the Riksbank, finds itself in a position wishing to address these very questions sooner rather than later, as the Scandinavian country’s payment system now effectively depends on a handful of commercial entities.
Sweden, which is tipped to be the first cashless society, has been on an inquiry path towards answering whether or not they will issue a CBDC. A recent report published by the Riksbank discusses the various routes and options that the suggested e-Krona could take, however, most pressing is the loss of providing its citizens a risk-free asset. Today, this is represented by cash which is a direct claim and liability of the Central Bank. The paper asks “..if banknotes issued by the Riksbank in practice disappear, will we then have a situation where the general public only has access to commercial bank money, and what would the concept of legal tender then entail?”
Slow Roll-Out Risks
Central Banks at present time are only researching a CBDC, and the actual deployment of one, should it come of age, could be a long way down the road. What does appear to be agreed upon across research papers is that any CBDC would be in tandem with bank notes and coins, with a potential phase out of cash. However, Sweden, who is set to make a decision on the e-Krona in 2019, find their arm twisted a little with the country’s use of cash which is already the lowest in the world (See Chart). The paper highlights quite clearly the problem they face, and which could face other nations should they not address the issue promptly – would the consolidation of Payment Services Providers (PSP) result in the financial sector monopoly not only on the wholesale, but also on the retail side of the economy?
A consortium of nine Swedish banks (Danske Bank, Handelsbanken, Länsförsäkringar Bank, Nordea, SEB, Sparbankerna, Swedban, Skandia, and ICA Banken) operate Swish, an app that provides peer-to-peer payments. Swish, which in 2017 was used by more than 8Mn people (up from 5Mn a year earlier) – close to 90% of the Swedish population – effectively represents a replacement of cash. Currently, transactions between these banks are instant and free of charge, a design concept that the e-Krona would adopt should accounts be held directly with the Riksbank. And while Swish has dominated consumer-to-consumer transfers, if a similar design is implemented for the e-Krona, this could mean free and instant transfers for consumer-to-business – what could be considered a competitive knockout for Visa and MasterCard.
If it ain’t broke…
Much like Sweden, the Danish population have also levitated towards a digital payment economy (See Chart). The Danes, or at least their Central Bank, may have rejected the idea of a CBDC altogether. A presentation by Governor Hugo Frey Jensen of Danmarks Nationalbank stated “a central bank digital currency would be a solution to a non-existing problem in a country with an efficient payment system.” This view was echoed a few days later in a speech on 30 October in Copenhagen by colleague Governor Per Callesen who said “..central banks – which are the banks of the banks – should not offer digital currencies to the general public.”
US Federal Reserve
Speaking at Yale earlier this year, Federal Reserve Governor Jerome Powell, who was recently nominated by US President Donald Trump as the next Chairman of the Federal Reserve, said that “private-sector products and systems already exist or are being developed that will fulfill demands that central-bank-issued digital currencies might otherwise seek to meet.” Mr Powell, who chairs the Fed’s Payment System Policy has been a vocal advocate of ensuring safety before fast payments and has said that a CBDC would stifle innovation. And while it might not be a direct problem for him as cash is still king in the USA, how Mr Powell will address his nations dwindling trust in the banking sector remains to be seen. The Pew Research Center places banks, behind the media, as having the most negative effect on the country.
European Central Bank
Not far off from sharing similar opinion with Mr Powell is Jens Weidmann, German Bundesbank President. Mr Weidmann, whom Berlin wishes to succeed from current European Central Bank President Mario Draghi in 2019, said “what might be a boon for savers in search of safety might be a bane for banks, as this makes a bank run potentially even easier.” However, should that be a concern, it could be a simple technical matter, much like the capital controls that were placed in Greece in 2015 and in Cyprus 2 years earlier in 2013.
Swedish Preferred Method of Payment - Cash Dwindling (%)
Source: Sveriges RIksbank
Number of Card Transactions Per Person
Source: ECB Note: Resident PSP's, e-Money Excluded.
Bank of England
Quite possibly at the forefront of the macroeconomic research and effects of a CBDC is the Bank of England (BoE), who also at this point in time has many unanswered questions. The BoE has given little indication on how it would design a digital currency. However, unlike their US and European counterparts, BoE representatives haven’t yet seemingly closed the door on the possibility of CBDC accounts being held directly with the Central Bank, but continue to research the possible effects on commercial banks. In a speech in 2014, Ben Broadbent, Deputy Governor for Monetary Policy at the BoE said “I suspect a more important issue for central banks considering such a move will be what it might mean for the funding of banks and the supply of credit.”
Bank of Japan
In a paper published by the Bank of Japan (BoJ) titled “Digital Innovations, Finance and Central Banking” last month, stated that “at this juncture, the Bank of Japan does not have any concrete plan to introduce CBDC.” Japan has a high cash use-rate – a whopping 70% of transactions in value are conducted in cash, so Tokyo might have time to further research the prospect of a CBDC and wait and see what other banks will do.
What the BoJ has done however, is extend its support to a consortium of banks lead by Mizuho Financial Group to develop a Yen pegged digital currency dubbed as the J-Coin, which is expected to publicly launch in 2020.
People’s Bank of China
In June, the People’s Bank of China (PBoC) setup the Digital Currency Institute, head by Yao Qian, a former deputy director of technology for the PBoC. On the sidelines of the second annual conference held at the Digital Finance Research Center of Peking University on 4 November, Mr Qian said “the development of digital economy needs central bank-issued electronic currency more than ever. It’s crucial to speed up the research and issuance.” China already has a mass adoption of mobile payments, which has caused the PBoC and regulators to scramble as a duopoly between Alipay and WeChat, the country's mobile PSP's takes shape (see story below).
Central Bank of Russia
Russia has also announced that they will be releasing a CBDC, the CryptoRuble (Diar, 6 November). Russian President Vladimir Putin met with Ethereum founder Vitalik Buterin in June, however little details have come to light following the announcement and the Presidential Orders that where given to Prime Minister Dmitry Medvedev, and Central Bank Governor Elvira Nabiullina.
Central Banks DLT Studies Positive, Exploration Continues
Central Banks have been testing various DLT solutions on the market, however, the verdict is still out on whether or not the technology can handle the mass amounts of transactions and complexities the industry faces. For the most part, cost, privacy and liquidity are the primary problems that the Central Banks wish to address.
Central Banks have been developing their centralized Real Time Gross Settlement (RTGS) platforms for decades and it has become an established system that works. In the case of the Bank of England, for example, the central bank processes £500Bn worth of transactions on a daily basis. Considering the volume, and high-value transactions conducted by Central Banks, it was only a matter of time before they put the new trustless technology to the test (See Table).
Michael Kumhof, Senior Research Advisor at the Bank of England said “one possible advantage of using DLT is the high level of operational resilience it might offer by avoiding a single point of failure.” And while most of the results did show positive outcomes and possibilities, some lingering concerns remain.
In an interview with CoinDesk, Jose Deodoro De Oliveira Filho, an analyst at Banco Central do Brasil, said that the Central Bank has resumed its testing on the various platforms after initial findings didn’t support a backup system for their current RTGS platform (See Table).
Mr De Oliveira pointed out that the Central Bank of Brazil had not been able to prove that using DLT would enhance, or be more cost efficient over their current RTGS platform. This concern was shared by the Bank of Canada in their findings after testing DLT on their systems. “It is not clear how costly a decentralized verification system would be; the issue has not yet been thoroughly investigated, although it is often claimed that a decentralized system is cheaper than a centralized one.”
And while cost could be addressed with the next phase of testing, privacy is also another concern. In August, the Central Bank of Brazil published their findings after testing and said that “privacy is still the main challenge: along these experiments, it was not possible to achieve privacy without giving up consensus.”
Cross-Border Payment Potential
What has seemingly sparked a positive note across the Central Banks is the potential to streamline cross-border payments that remain slow, opaque and tie up liquidity. The Bank of England concluded its trial with Ripple and said “Cross-border payments when applied to wholesale markets present different challenges than when compared with retail and corporate transactions, which the Ripple product is designed to handle. The availability of liquidity is one such challenge, and the Proof of Concept allowed the Bank and Ripple to begin exploring these questions.”
Central Banks Comments on DLT Testing
|Central Bank||Date||Comments||DLT Technology Tested|
|Bank of England||July 2017||We successfully integrated the Ripple solution with two simulated RTGS systems, hosted in the cloud, and demonstrated that we could process a successful cross-border payment across two RTGS systems simultaneously.||Ripple|
|Bank of Canada||June 2017||A pure stand-alone DLT wholesale payment system is unlikely to match the net benefits of a centralized wholesale payment system.||Corda|
|European Central Bank & Bank of Japan||September 2017||A thorough set of results that provide reasons to be optimistic with respect to the capabilities of DLT within payment systems.||Hyperledger Fabric|
|Sveriges Riksbank||September 2017||From a purely technical point of view, we can see nothing at this point in time that would prevent an e-krona solution built around a central register.||-|
|Monetary Authority of Singapore||November 2017||With the potential of operating a DLT-based RTGS system, the conventional role of a central bank or payment system operator as the centralised infrastructure operator in the ecosystem will be obsolete. This would also mean that a central financial market infrastructure operator would not be necessary, as the processes and data are distributed across the participants in the DLT network. A DLT-based RTGS system reduces the costs and resources for the dayto-day operations and eliminates the risk of the central bank being the single-pointof-failure of the entire financial ecosystem.||Hyperledger Fabric, Corda and Quorum|
|Bundesbank||September 2017||The Bundesbank’s experts see little prospect of DLT being put to widespread use in the field of individual and retail payments given the current state of the art. They concede, however, that it is still unclear whether DLT also has the edge over today’s technology in terms of security, efficiency, costs and speed.||-|
|Central Bank of Brazil||August 2017||The Distributed Ledger Technology could make possible to create an unique shared view of a large variety of information fed and replicated across institutions. However, privacy is still the main challenge: along these experiments, it was not possible to achieve privacy without giving up consensus.||Hyperledger Fabric, Corda and Quorum|
Alipay Continues Expanding Its Tentacles
Ant Financial Services Group wallet Alipay boasts some 520Mn active users and continues expanding its network with both consumers, and merchants at home. And 2017 has seen new partnerships develop internationally with the payment service provider giant in an effort to allow Chinese tourists to use their wallet whilst travelling abroad.
China leapfrogged the credit card strip, and moved directly into a mobile payment heavy retail payment service industry. Set to reach over $12Tn by 2020, China dwarfs the US in mobile payments. China’s mobile PSP’s processed over $5.5Tn in 2016, compared to the $112Bn in the US according to Forrester Research (see chart below).
Alipay has been looking to expand its reach to assist Chinese tourists around the world settle payment through their mobile app. With deals from neighbouring countries to the US, Alipay is set to make their wallet available for the 120Mn outbound tourists from China.
Select Alipay Partnerships
|USA||JP Morgan Chase, Verifone|
Ripple, Amex Launch US/UK
In what could be considered one of the first commercial cross-border uses of blockchain, Ripple announced that they have opened a corridor to settle instant international payments between the US and Britain in a partnership between American Express and clients of Spanish Santander that bank in Britain. This does away with old institution of Swift, and uses Ripple's service xCurrent.
Ripple completed a successful Proof-of-Concept with the Bank of England (B0E) earlier this summer (see story above). One of the next steps for the BoE was to explore matters of cross-border payments.
Visa Targets Asia For 2018
Cross-Border B2B Payments Launch
Visa is slated to begin testing on its B2B Connect platform that plans to facilitate cross-border payments for their business clients, with a commercial launch set for Mid-2018.
Unlike MasterCard who announced their B2B Blockchain service earlier in October (Diar, 30 October) where no actual value is transferred, Visa has been working with San Fransisco based blockchain outfit Chain to provide real-time fund transfers.
The announcement said the partnership included Shinhan Bank in South Korea, Union Bank of Philippines and United Overseas Bank in Singapore.
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