How blockchain is set to transform the P2P lending market
Ablrate CEO David Bradley-Ward weighs in on the benefits that blockchain could bring to peer-to-peer lending.
Of all the promising new technologies to emerge in the financial service sector, blockchain has one of the most promising futures. By 2024, the global blockchain technology market is expected to be worth $20 billion.
Essentially a real-time distributed database, blockchain is helping to make local and global transactions faster, cheaper and safer and when these benefits are applied to the P2P lending market, the playing field is levelled for both investors and borrowers alike.
The global P2P lending market is soon forecast to be worth $1 trillion. The application of blockchain technology will only increase its value as it opens-up new markets, reduces costs and increases efficiencies.
So much more than just a ‘fad’, blockchain represents the next chapter of growth for the P2P industry. However, those in the industry holding back with a ‘wait-and-see’ strategy, risk being left behind.
Are we there yet?
Less than a decade ago, the concept of blockchain was born. Despite distributed ledger technology proving it can solve many practical issues, scepticism remains.
Bankers will tell you the traditional financial system is ‘global’ and ‘efficient’. However, if you’re a non-bank lender who would like to diversify your global lending potential, you will find that it is punitively expensive, time-consuming and aimed almost exclusively at international banks and funds and we are told ‘that’s capitalism’.
Capitalism is, indeed, the best system we have to run the global economy, the problem is, Capitalism has its flaws. An example of rampant, unchecked capitalism is the global debt market.
The global financial crisis was largely caused by toxic pools of debt artificially created by banks and bought in trillions of dollars by funds around the globe. Subprime debt was mixed with prime debt to make these instruments less ‘smelly’.
This led to an insatiable appetite for debt, bundled up and sold to funds and banks who didn’t really understand what they were buying, at a huge profit for the originators. The result was the financial system choked on its own creation; toxic debt defaulting everywhere.
Blockchain represents a solution for transparency and the trading of private debt internationally, by everyone. Using cryptocurrencies to invest in businesses across the globe and trading that debt can be done without experiencing delays or high fees which means that it is more inclusive and available for everyone.
Follow the money
Any player in the global financial market who waits for others to make the first move when it comes to blockchain technology risks being left behind. The saying ‘Act. Don’t react’ has never been so pertinent.
Trading private debt on a peer-to-peer basis has never occurred in any large volume. The global solution, thus far, has been to ‘bundle’ private debt into vast securitisation issues. Therefore, it seems a logical path to make debt originated by different platforms tradable on one market, enabled through blockchain technology.
An international platform with ultra-low fees, allowing smaller transactions, would transform the international private debt market and add an exciting layer to an already booming alternative lending sector.
Another developing area is crypto-based lending, catapulting the idea of asset-backed lending into the future, creating an ecosystem where borrowers can raise money against crypto as security and investors can lend against cryptocurrencies.
P2P lending platforms, investors and borrowers have much to gain from this upgrade. Firstly, as cryptocurrencies are completely independent of banks, there are ultra-low transaction fees, making P2P lending more cost-effective for all.
Secondly, there’s an opportunity to diversify investment portfolios across countries and continents, meaning borrowers benefit from a global pool of lenders, regardless of where they live.
Then there’s the fact you only need internet access to take part. With 39 percent of the world’s population unbanked, this opens the door for anyone, anywhere to lend and borrow.
Crossing the trust threshold
Blockchain is one of the more misunderstood emerging technologies. Despite maturing quickly, the transition from experimentation to broad acceptance has been slow.
Only recently, the President of CryptoUK warned the UK Government the country is at risk of missing out on the global crypto economy if it fails to keep up and recognise the sector in the Financial Services Act.
It can be difficult to build widespread trust when many of the world’s governments are yet to make a decision on what they want to see when it comes to the latest financial regulations.
There will be a trust tipping point which may lead to broad adoption, but it’s up to supporters to acknowledge and address today’s sceptics. The new and uncharted territories of blockchain enabling private debt trading and crypto-based lending are not risk averse but they both mark an important step forward in making the investment process more transparent, accessible, safer and ultimately, more rewarding.