More than ever, cryptocurrencies are helping global investors with small businesses secure short-term loans. In developing countries, many small businesses struggle to obtain capital. While micro-banks and crowdfunding help to fill that gap, the unbanked find their business capacity to survive economic downturns to be somewhat precarious.
However, cryptocurrencies like Debitum, OmiseGo, Stellar, and SALT are changing this reality. Their success with the unbanked is already putting traditional banks to shame. As Martins Liberts, co-founder of the Debitum Network, notes that the lending industry is ripe for disruption.
Our current financial system needs disruptive and radical changes in order to become more transparent, accountable and reliable. Blockchain driven companies can be the pioneers that will spearhead the change and transform the opaque and outdated financial system into a much better one.
In all, cryptocurrencies offer four major advantages over traditional lending
1. Crypto Offers Greater Lending Options
Until recently becoming a lender wasn’t an option for most small investors. Traditionally, lenders needed to be registered as a bank or financial institution, a lengthy and bureaucratic process. Alternative finance options such as crowdfunding and microfinance have somewhat changed that. Now, several more lending options exist.
Debitum: For investors seeking to lend to small businesses, Debitum leads the way in providing additional service options for investors, such as insurers, risk assessors and debt collectors. The company’s primary focus is to help small businesses achieve financing without middlemen.
OmiseGo: For simply reaching the unbanked, OmiseGo may serve as the best solution. Actually, its mission is also to “unbank the banked”. They aim to do this by delegating the functions of traditional clearing houses to smart contracts on the Ethereum Blockchain.
Stellar: Likewise, the Stellar platform connects banks, payments systems, and people. They seek to create a network known for moving financial assets quickly, reliably, and at almost no cost. Stellar currently helps facilitate cross-border transactions for Deloitte and many other large financial institutions. At present, its helping investors access Middle Eastern and South East Asian markets.
SALT: Finally, SALT. Like OmiseGo, it’s primarily focused on using “blockchain technology and smart contracts to offer a lending program based on cryptocurrencies as a collateral.” However, the SALT Bridge Foundation uses “blockchain technology, cryptocurrency education, and lending services to financially empower those without banking services in the developing world.” Lenders must pass SALT’s Lending Suitability Test.
By helping investors fund short-term loans of all kinds in developing countries, these cryptocurrency outfits are helping to fill a long overlooked market-niche.
2. Crypto Lending Is More Global
Although online lending to small businesses continues to grow, lending in developing markets remains problematic. The ability to conduct money transfers or correctly assess loan risks loom large as continuing impracticalities. However, cryptocurrency lending outfits are quickly finding innovative ways to overcome these obstacles. For instance, Debitum is creating an online dashboard where any investor can quickly make a small business loan. Likewise, OmiseGo’s digital wallet now gives users the ability to quickly trade both cryptocurrencies and fiat currencies.
Small, innovative ideas like these are making lending to small businesses halfway around the globe increasingly easy. And for borrowers, it’suntil welcome relief, as interest rates in developing countries can be as high as 15 percent. Small business loans represent a growing opportunity for cryptocurrency investors. The World Bank estimates that up to 70% of small businesses cannot secure the finances they need from traditional banks. Small business lending in these markets is expected to reach $90 billion in 2020, up from $34 billion today.
3. Crypto Lending Offers Unique Benefits
Aside from the additional lending options that cryptocurrencies present (as mentioned above), they present other benefits as well. As Blockonomi reports, setting up a lending account on an exchange or crypto lending platform is a far quicker experience than setting up a bank account. They also note that lenders need not monitor their funds constantly and how they’re being lent out.
In addition, the risk mostly stays with the borrower. As noted in Blockonomi, “if (a borrower) shorts the price, and it ends up increasing, it will be their loss, rather than (the lenders).” Another difference is that, with crypto lending, investors who seek to get into margin lending do so by joining a lending pool (as opposed to
Finally, “most platforms have methods of ensuring that the funds and interest rates are automatically paid back to you.” This feature may even encourage some lenders to automate their lending set-ups.
4. Crypto Lending Quickly Gaining Speed
As reported in The Motley Fool, Bitcoin investors have two very strong incentives to enter the lending market. One is the need for Bitcoin owners to find a tax-friendly exit strategy. At present, the IRS taxes bitcoin profits as capital gains if held for more than a year. However, bitcoin loans are NOT taxable. As noted in Motley Fool,
If you put up bitcoin as collateral for a dollar-based loan, then you can spend the money immediately without having to pay any taxes on the gain in value in your bitcoin holdings. You’re on the hook to pay back the dollar-based loan, but you can sell bitcoin later on when the loan comes due and defer any taxes until that later sale. Alternatively, you can presumably extend the loan if your lender agrees — as long as the value of the bitcoin collateral remains adequate to secure the loan.
untilto avoid taxes will drive demand for bitcoin loans.
Another reason bitcoin loans are soaring in popularity is their ability to hedge risk. Previously, bitcoin’s volatility made it a less-than-ideal asset for banks to take on as collateral. That changed overnight when a bitcoin futures market was introduced to investors last year.
Today, financial institutions “can use futures-based risk management techniques to hedge the potential exposure to a collapse in bitcoin prices.” With bitcoin investors willing to take up the risks that financial institutions cannot, lenders will be able to protect themselves.
As you can see, cryptocurrency lending is beginning to disrupt the banking industry. However, as many banks realize they cannot sit on the sidelines, a select few are moving to either emulate or partner with existing lending cryptocurrencies. They certainly have a reason to, as those who were previously unbanked still remain potential customers.