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Hackernoon logoPeer-To-Peer Lending with Cryptocurrencies by@fastinvest

Peer-To-Peer Lending with Cryptocurrencies

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@fastinvestSimona Vaitkune

As a financial company, we see many benefits in embracing the blockchain technology. First, there’s the opportunity to improve the financial sphere of the digital economy and make it more available to everyone. Then, there’s the bonus of taking the data security and transparency of transactions to a whole new level. By integrating the three major cryptocurrencies — ether, bitcoin and Ripple — into the Fast Invest platform, we’re hoping to edge (if ever so slightly) the crypto movement in the right direction.

Not sure how P2P lending can benefit from cryptocurrencies? Here’s our two cent’s worth on the topic.

A brief history of P2P lending

Peer-to-peer lending, or as it was known in the past — social lending, has been in use since the 1700s. Jonathan Swift, the famous Irish author of “Gulliver’s Travels” set up one of the most popular lending programmes called the Irish Loan Fund. He recognised that individuals from low-income families in rural areas had no experience with credit and held little collateral but could still be considered creditworthy. Swift lent small amounts of money and charged no interest.

Throughout 18th and 19th centuries, peer-to-peer lending has reached its peak and become one of the most widely used methods of lending in Europe. By 1800s, more than 300 lending programmes were operating in Ireland, lending small amounts of money for short periods of time. However, when banks gained more influence in the 20th century, peer-to-peer lending was somewhat pushed to shadows.

A Bangladeshi social entrepreneur, banker, economist, and civil society leader, Dr. Mohammad Yunus pioneered the modern version of peer-to-peer lending in Bangladesh. He was later awarded the Nobel Peace Prize for founding the Grameen Bank and spearheading the concepts of microcredit and microfinance. His goal was to empower entrepreneurs who were too poor to get traditional bank loans. Yunus successfully established and grown the Grameen bank to more than 8 million borrowers, with 97% of the microloans going to businesses headed by women.

The first online P2P lending platform launched in 2005. To date, the platform has lent more than £2.8 billion to UK consumers. The concept of online P2P lending is similar to the microfinance vision that both Swift and Yunus have pursued. However, the main difference between the earlier forms of microlending and the emergence of direct onlinelending is that it was the first time such service existed in a prosperous country. P2P lending is no longer about giving unbanked people access to finances; it’s more about providing borrowers with an alternative to sizable interest rates charged by traditional banks.

The bankruptcy of Lehman Brothers in 2008 has really kicked peer-to-peer lending into action. As trust in financial institutions fell to record lows and people struggled to secure credit at a reasonable interest rate, P2P lending platforms stepped in to fill the void and were immediately accepted as a viable alternative. In the five years after the financial crisis, peer-to-peer lending went from a marginally popular activity to a mainstream choice.

Both lenders and borrowers benefit from peer-to-peer lending. It offers lower interest rate to borrowers and a chance to secure credit for those who have a dented credit history. Investors who lend through P2P platforms enjoy a significantly higher interest rate than any savings account could offer and can also take advantage of various tax relief measures. For example, at Fast Invest, investors routinely rake in 8% to 13% returns a year. Last but not least, everyone involved benefit from improved transparency.

While P2P lending has revolutionised the way people save, borrow and invest money, the young industry is itself close to being disrupted by cryptocurrency providers. Cryptocurrency fans argue that blockchain technology could have a truly transformative effect on direct lending. Arguably, P2P lending with bitcoin or ether, the two most popular digital currencies, will offer greater transparency, efficiency and scalability, and potentially, lower costs to all.

One of the most significant advantages that crypto-proved lending provides is loan tokenization. While the traditional lending industry is practically built on the trading of debt forms, the option isn’t available to P2P loan investors. Or should we say isn’t available yet? Using blockchain would make loan tokenization possible, enabling investors to easily trade their loans with other P2P network participants and improve the market’s liquidity. The blockchain technology and P2P lending feel like natural allies, so we expect to see new partnerships, services and products built from the ground up entering the fintech industry in the nearest future.

Let’s talk about cryptocurrency: what is it and why is it important?

With cryptocurrencies hitting the headlines again, it’s not unwise to circle back to fundamentals. By now, almost everyone will know that cryptocurrencies are virtual currencies, digital money, or simply tokens — pick the term you like most. Cryptocurrencies are nothing like our normalcurrency — British pounds, US dollars, Euros; you get it. Digital currencies can only be used online; no one is walking around with pockets stashed with bitcoins or ether. Another distinctive characteristic of cryptocurrencies is that they’re completely independent of central banks or governments. No one controls the digital money.

Cryptocurrencies are organised through a network better known as blockchain, which is a shared distributed ledger that records every transaction, agreement, or contract. Transactions on blockchain are irreversible and inherently transparent, making the exchange of value more reliable. There are plenty of benefits of using tokens, but the most notable ones include:

  • Low transaction fees. Compared to fees on credit card transactions, cryptocurrencies have minimal and in some cases no transaction fees.
  • You own it. When you keep your money at a bank, it can be frozen or limited by the bank, government or another entity. With digital currencies, as long as you have the private key and the corresponding public key that makes up a token address, no one can take it away from you.
  • Accessibility. There are thousands of unbanked people in the world. But everyone who has access to the internet can make and receive payments in digital currencies.
  • It’s really fast. International wire transfers can take up to 3 business days to arrive, not to mention cheques that sometimes take five business days to clear and reach your bank account. Cryptocurrency transactions are almost instantaneous, with more complex operations taking 10–20 minutes.
  • Your identity is protected. When shopping online, you are always required to enter all your sensitive information, such as the credit card number, expiry date and CSV number, which exposes you to serious risks. If you’re paying with digital money, you can send it directly to the recipient without disclosing any information except the total amount you want to pay.

What do crypto assets bring to the P2P market?

The burst of blockchain technology has brought about a new era in the fintech industry. It is often seen as the invisible technology that’s changing the world, and especially, the digital life we lead online. Everything from travel insurance to banking to P2P lending is being rethought in the light of the emergence of this new technology. Blockchain may be the answer to a very old and nagging question — how can we collectively trust what happens online?

Equality on a global scale

How is it fair or sensible in any way that poor people in poor countries have to pay triple the interest rates compared to those in developed and prosperous nations? Well, it’s not, and it will never be if the money will continue to be funnelled via central institutions like banks. Global decentralised P2P platforms using blockchain technology will be able to offer the same terms regardless of citizenship or inflation.

Besides that, the global reach enabled by crypto lending offers a unique advantage to P2P investors. As they get the choice to lend to anyone, anywhere, the geographical diversification dramatically reduces the systemic risk, posed by local economic ups and downs. On top of that, lower operational costs mean higher returns for investors.

No one’s left behind

39% of the world’s population doesn’t have a bank account. McKinsey’s research found that there are still about 2 billion unbanked and underbanked people worldwide. As discussed earlier, one of the prime benefits of using cryptocurrencies is that it enables borrowers without a bank account or credit history to take out loans. That could never be possible within the traditional banking system. Blockchain-based P2P lending platforms can bring financial services to clients who have previously been barred from participating in the economy.

Conclusion

Cryptocurrencies are a clean and transparent alternative to established fiat currencies, and it’s a technology that betters society. Like every revolution, it will need to plough through some resistance, but it should get there in the end. Combining the benefits of direct lending with the foolproof technology like blockchain will make lending, borrowing and saving money as simple, transparent and efficient as it should be.

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