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Disruption or evolution? Why blockchain is the future of global lending

(Image credit: Image Credit: Zapp2Photo / Shutterstock)

Blockchain, the new buzzword in tech circles, is rewriting the rules in many industries. Essentially a public ledger able to record and verify a high volume of digital transactions, it bypasses borders, governments and economic systems, making both local and global settlement quicker, more transparent and cheaper.

Global spending on blockchain solutions is estimated to reach $2.1 billion this year, but for there to be a blockchain revolution, many barriers – technological, political, organisational and societal – need to be overcome first. 

While some view blockchain as an uninvited disruptor, others are welcoming it with open arms. In the financial sector, this is especially true, with only a handful of ‘traditional’ banks blazing the trail and investing in blockchain technology to deliver new digital services.

If you can’t beat them, join them

Currently, citizens in Europe have the lowest levels of ‘complete trust’ in traditional banks. This is worrying, given money is simply a means of exchange, built on the trust bestowed upon it.

Conversely, blockchain is inherently trustworthy due to the immutable recording of transactions or ‘blocks’ and its independence from a central authority. Some think this puts into question the future of fiat currencies around the world. Some even claim blockchain could’ve prevented the 2008 financial crisis by giving regulators visibility of trading portfolios and the untainted records of the trades that lead to an individual portfolio’s make up.   

The financial services industry has always been primed for disruption, with long-standing challenges just waiting to be solved by new technologies. Fintech 2.0 looms around the corner and is set to deliver fundamental changes to the infrastructure and processes at the core of the industry, changing how we spend, save and borrow for the better.

However, some bankers will tell you the traditional financial system is ‘global’ and ‘efficient’ as it is, despite being fully aware of its flaws. In our industry, lending, if you’re currently a non-bank lender who would like to diversify your global lending potential, you will find that it is punitively expensive, time-consuming and exclusive to large funds and traders. This ultimately reduces the potential reward for non-bank lenders through fees. 

It seems it’s up to the brave few to test the waters before others take the plunge. Santander InnoVentures with its partners recently published a paper calling for greater collaboration between fintechs and traditional banks. Only by working together will the full benefits of Fintech 2.0 will be realised, it claims. 

Peer-to-peer living up to its name

The alternative finance sector lends itself extremely well to the peer-to-peer network that makes up the blockchain, making access to finance and global lending more rewarding for both lenders and borrowers.

Any transaction in a blockchain ledger is openly verified by a community of networked users rather than by a central authority. This makes transactions faster, safer and cheaper because there are no intermediaries or delays.  

Given the astonishing fact 39 percent of the world’s population are unbanked, blockchain technologies and associated crypto currencies could open the door for anyone, anywhere to lend, borrow and invest. All you need is internet access. 

For example, currently, there is no easy way for individuals to trade global debt across continents, meaning this market is largely untapped. Up until now, the solution has been to ‘bundle’ private debt into vast securitisation issues which are sold to funds around the world and, by definition, that included pension and saving funds of retail investors. It’s evident from the subprime mortgage crisis that this isn’t a great system.

Blockchain represents an opportunity to diversify investment portfolios across global markets, making debt originated in different countries and on different platforms tradable. For example, opening-up Asian debt for European lenders and vice versa, without high transaction fees, legal red tape or even a bank account if crypto currencies are accepted. 

And there you have it, peer-to-peer lending can finally live up to its name, adding an exciting layer to an already booming sector which is expected to reach the $1 trillion mark by 2025. 

Converting the non-believers

Blockchain is a new and unchartered territory but one which is being explored and conquered quickly. The World Economic Forum predicts by 2025 10 percent of global GDP will be stored on blockchains and that is mind blowing.

Yet many governments, regulators and corporations around the world have been slow to recognise cryptocurrencies as legitimate, meaning banks continue to dominate the space.

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. 

Despite digital currencies experiencing some growing pains this year, the technology underlying blockchain is a bulletproof record keeping system, of whose data isn’t stored in one central location and is secured by a private key stored offline. All transactions are verified, cleared and stored in a block, creating a chain which cannot be altered or deleted. 

Given 80 percent of the UK public don’t trust the organisations storing their personal data, companies using blockchain technology to secure their systems have a lot to gain. 

This concept of blockchain is nothing new; it’s the culmination of what Alan Turing started during World War II. Back then, just like today, people underestimated the power of cryptology to change the world.

Sometime soon there will be a trust tipping point which, more than likely, will be led by the demands of customers who have come to expect global, digital services. Those companies who can’t provide these services risk losing their customers, reputation and profits.

While not completely risk adverse, lending platforms underwritten by blockchain technology can offer both borrowers and lenders a more global, transparent and rewarding experience. 

Adoption will be gradual and steady, as waves of technological and institutional change gain momentum. But whatever your outlook, blockchain technology is reshaping the economy and is here to stay. 

David Bradley-Ward, CEO of Ablrate

Image Credit: Zapp2Photo / Shutterstock

David Bradley-Ward
David Bradley-Ward is the founder and entrepreneur behind the platform and other financial and commercial businesses. He is also the Director of the European Association of Peer to Peer Lenders (EAPPL).