Every couple of months, a new trend comes along that captures column inches and crypto Twitter chatter, before everyone moves on to the next new thing. Last month it was defi, before that IEOs, and before that exchange tokens.
Right now, the hot topic is crypto lending, and it comes bearing an intriguing question: are crypto lending platforms a solution to a common problem, or a solution in search of a problem to wrap itself around?
The battle lines have been drawn and the troops assembled. On the one side stands the combined might of the banking cartels, centuries of deeply entrenched financial infrastructure supporting them.
And on the other side stands a handful of crypto companies armed with little more than a passionate plea: “Ditch the legacy system and come join us. Where we’re going, you won’t need banks.” It’s an enticing call – but is anyone heeding it?
Crypto Lending: Innovation or Emulation?
Before we attempt to answer that, some basic facts: getting a bank loan for personal or business use is extremely hard, verging on the impossible these days. Unless you have property you can collateralize against, you’ll struggle to get a loan, and even if you do, the interest will likely be exorbitant. Gone are the days when you could walk into your bank, have a sit down with the manager and thrash out the terms of a loan with which to start your own business.
Attempt that today, casually dropping into the conversation that you were planning your own crypto startup, and not only would you be refused credit, but you’d be liable to have your account closed.
Such is the suspicion with which the legacy financial system views crypto. They’ll be proven wrong eventually, around the same time as the last of their venerable banking houses are being converted into nightclubs and apartments.
From Bricks and Mortar to Binary Code
Bartlomiej Wasilewski is the founder of Marshal Lion Group, a tokenized lending market that provides non-bank loans for businesses and individuals. He told news.Bitcoin.com: “The digitization of finance is inevitable, not just within the crypto sector, but also more broadly, as shown by the rise of microloan platforms that enable individuals to lend capital to businesses, while retaining oversight over how it is deployed, and the ability to witness the benefits of their investment in action and be remunerated for their services.” He added:
Within the crypto space, lending is about more than simply attempting to mirror the products to be found in the traditional financial system. A lot of crypto businesses struggle to obtain banking facilities, and for these entities, having access to alternative sources of capital, be it as a bridging loan or to support long-term growth, is vital.
Wasilewski’s vision is slowly materializing, but the wounded banking system is not yet in its death throes. It will likely take a decade or more before digital currencies render it obsolete. In the meantime, those who have been refused credit by financial institutions are being urged to turn to crypto lending. But are crypto lending protocols and platforms enterprise-ready? And if so, what do they have to offer entities that have been turned away by the banking system?
Anything the Banks Can Do, Bitcoin Can Do Better
Crypto lending has been a slow-burning trend this year, before exploding into life this week in a flurry of announcements. In July, for example, Bitcoin.com partnered with lending platform Cred to offer up to 10% interest on BCH and BTC holdings. The lending platform enables borrowers to obtain $25,000 or more in fiat currency, in exchange for collateralized crypto assets. Then, on Monday August 26, news.Bitcoin.com published an article on the changing crypto exchange landscape, which ventured that more exchanges are likely to introduce lending services in the near future. That future proved to be closer than imagined, for the very same day, Binance revealed its new lending platform.
The focus of its release was on the benefits to lenders, who will earn annualized interest of up to 15% on their BNB, USDT, and ETC. On Wednesday, the first round subscription was filled in less than 20 seconds by lenders eager to lock up their crypto assets. This feat says something about the level of interest in crypto lending, but it probably says more about the strength of the Binance brand. It may also say something about the diminishing ways for people to earn interest on their fiat holdings: thanks to negative yields, you are now likely to be penalized for purchasing 30-year government bonds.
Following up on the launch of Binance Lending, news.Bitcoin.com spoke to crypto-fiat exchange service Wirex, whose co-founder Dmitry Lazarichev commented:
Having identified some interest from our customer base, Wirex has been exploring the options for crypto lending with existing regulatory frameworks. Consumer lending products are usually heavily regulated, hence we’re focused on finding the best structure for it.
Lazarichev’s carefully worded comment hints at the growth areas being explored within the lending space by crypto projects. A fortnight ago, Coinbase expressed similar intent, writing: “In addition to custody, we’re excited to explore new ways to monetize and leverage crypto assets such as staking, borrowing against crypto portfolios and lending crypto to trusted counterparties.”
To complete an intense week for crypto lending, Ethereum-based P2P platform Dharma revealed today that it will be sunsetting its existing business in favor of creating a new platform that will be integrated with Compound. With $103 million locked into its protocol, Compound is dominating the decentralized lending game.
New @Dharma_HQ is genius. Nocoiners are scared of crypto, nobody is scared to earn interest.
1) Connect bank & deposit money (like in @RobinhoodApp or @Wealthsimple)
2) Earn 10%+ APR
No crypto jargon, no scary DAI, no lockup – withdraw cash to bank acc whenever you want.
– Khallil (@kmx411) August 29, 2019
Nothing Comes for Free in This Life
The proliferation of crypto lending products is to be welcomed, but there is something missing from all this breathless news about locking up crypto assets and filling subscription quotas in record time: what about the borrower who doesn’t have any crypto assets? Doesn’t that place them in the same situation as the man who walks into the bank with nothing but the shirt on his back and a business idea? The short answer is yes. If you don’t have crypto to collateralize, Binance Lending won’t give you the time of day.
The more nuanced answer is that there are tools currently being developed that will enable crypto lending products to meet the needs of a broad range of borrowers, including those who possess intangible collateral – like reputation. From the social credit scoring of Bloom to the emergence of lending platforms that allow unconventional assets (like skins and NFT collectibles) to be collateralized, crypto lending is evolving. Some of these products are being built upon existing lending protocols such as Compound, or upon Bitcoin itself using layer two smart contracting solutions such as RSK and Echo. There are also microloan platforms in the works that will give businesses that lack a credit rating access to capital.
Essentially, the crypto lending space looks set to mirror Bitcoin’s trajectory:
Right now, the legacy financial system, for all its flaws, is unavoidable for the majority of businesses and individuals. Quality and diversity of crypto products including lending services have improved, however, it will become possible to exist wholly in crypto. No more banks, no more bank managers, and no more credit agencies to appease. Crypto might not be the answer to all the world’s problems, but it’s a sight better than what’s currently on the table. Give it time, and it’ll leave the fading financial system in the dust.