The most popular financial service is still credit. Every second person used the services of a bank to lend money. But the rapid development of cryptocurrencies has given rise to such a phenomenon as “bitcoin credit”. The article discusses all the nuances and features of lending in cryptocurrency and tells where to get such a loan. And also here you will learn about the prospects for this type of business.
1. How lending in bitcoins works
5-10 years ago, the financial services market was almost completely controlled by large banks and microfinance organizations. With the development of information technology and the penetration of the Internet, the situation changed. There is now a huge variety of fintech startups and online services that provide financial services. The rapid growth of the capitalization of cryptocurrencies in recent years and the attraction of the attention of the whole world to them provoked the emergence and development of Internet services, the key idea of which was financial transactions with cryptocurrencies.
In the first wave, services began to appear that make it possible to get crypto loans in bitcoins. In reality, however, the word “credit” does not quite correctly reflect the essence of the phenomenon. We are talking about P2P lending when users issue loans to each other without the participation of a bank. Specialized sites act as a meeting place for potential borrowers and lenders. Both parties are usually ordinary people who need to be borrowed money or want to invest temporarily free money.
This idea has long been implemented in relation to fiat money. In Russia, individuals issue and receive loans in rubles and dollars, for example, on the popular WebMoney Transfer service. P2P cryptocurrency platforms began to appear in 2012-2013. They made it possible to take out a loan in bitcoins from ordinary people, bypassing interaction with the bank. The borrower registers on the site, creates an application for a loan in bitcoins, independently assigns the loan amount, repayment period and interest, as well as a payment scheme. Lenders, if satisfied with the conditions, accept them, and issue a certain amount of bitcoins. The lender can offer any amount, even less than the borrower’s needs. Therefore, most often one loan is financed by several users at once. This allows you to split the amount into as many small parts as you like and thereby minimize risks,
Assessment of the borrower’s solvency is based on a system of internal credit ratings. A high rating reduces the risk of loan default. The rating demonstrates the level of trust in the user on the part of other system participants. It directly affects the percentage and number of people willing to borrow bitcoins.
- It was possible to bypass the complicated and bureaucratic procedure for licensing the credit business in most countries. The absence of the need to obtain licenses, maintain reporting to regulatory authorities and central banks, as well as not pay taxes, reduces the lender’s costs and the thresholds for the inflow of free funds of individuals into this type of business. Consequently, this affects the interest paid.
- The possibility of international lending has been implemented. It is no secret that the cost of attracting borrowed funds is different in different countries of the world. Interest rates on loans in the USA rarely exceed 10%, while in Russia it is difficult to find offers below 20% per annum. But it is virtually impossible for a non-resident to get a loan from a foreign bank. This can only be afforded by representatives of a very large business, having gone through complex, lengthy and intricate legal procedures. Individual entrepreneurs and even individuals from any country in the world can take out a loan in bitcoins.
- Fast transfers without commission. Transferring funds from one state to another through traditional financial intermediaries will inevitably be subject to significant fees. And if the transfer amount exceeds at least a few thousand dollars, you will have to come to the bank to fill out the papers required by law. Transfers in bitcoins are carried out almost instantly and with very low fees.
2. Where to get a loan in bitcoins
The active development of lending services in bitcoins began 5 years ago. During this time, they managed to achieve success, and then several popular services were closed. Among them, for example, BTCJam.com and BitLendingClub.com. The first site was one of the few that had a Russian-language interface and was focused on CIS citizens. During its existence, it has issued more than $ 13 million in loans and has united 100,000 users. However, both sites are now in the process of closing. BTCJam announced the closure on May 25, 2017, on the company’s blog. The official reason for the closure is announced changes in legislation and the complication of regulation by government agencies of operations with bitcoins.
Today, you can get a loan in bitcoins on the following sites:
- CredEarn positions itself as a global marketplace where small business loans can be raised using blockchain technology. In total, more than 100,000 users are registered, more than 2,000 loans have been issued for the amount of about $ 3.5 million.
- Youhodler provides a wide range of financial services. Among them are loans in bitcoins. It positions itself as a full-fledged bank for cryptocurrencies.
- StemFund a distinctive feature of StemFund is the ability to first fill in your data, try to find interested lenders, and only then confirm the entered data. According to the founders of the service, the initial registration takes less than 1 minute.
Separately, it should be said about the Youhodler company Ripio from the UK. The startup was founded in 2014, and in 2017 raised $ 1.9 million in investments from several large venture capital funds. Previously, the company was engaged in processing in B2B payments and a merchant, and now it is increasingly focused on retail customers. In particular, Youhodler launched a global cryptocurrency lending system. An important distinguishing feature of this project will be its focus on emerging markets, including the US market.
3. Is it possible to get a loan in bitcoins in the UK?
Leading lending sites claim to provide services to people from all over the world. Although this is formally so, in practice it is difficult for residents of the UK or other CIS countries to obtain a loan in bitcoins. Citizens of the United States or Western Europe are consistently considered more solvent and conscientious borrowers. This does not mean that there is no hope for a loan. But you need to be prepared for the fact that you will have to register in several lending services at once, fill out the questionnaire in each of them as much as possible, wait for potential creditors for a long time, and expect a higher percentage.
4. What you need to get a loan in bitcoins
To get a loan in bitcoins, you need to register with a credit service and go through the verification procedure. Since the services do not have access to the credit history of borrowers, they carry out the most complete verification and user identification. After completing the profile, a rating is assigned, expressed in points or letters (A, B, B +, etc.). Based on it, lenders will decide on the lending of bitcoins. Therefore, a completely and correctly completed profile determines 99% of how much and at what percentage you will receive a loan. And will you get it at all? You need to be ready to provide and download scans of documents confirming:
- Real surname, name, patronymic
- Home address and registration address
- Mobile phone, e-mail address
- Passport data
- Links to social media profiles
- Personal photos by sample
- Debit card photos
- Login and password (!) From the Internet bank. In some countries of the world, this is the norm and is widespread everywhere. Internet banking data will allow service employees to identify the borrower’s income and verify personal data.
Each item will be carefully checked by the service staff. An SMS code will be sent to the specified phone number or an employee will call to clarify personal data. They check the registration address, photos, check social networks, and so on. Only after everything has been verified can you start creating an application for a loan in bitcoins. In the case of non-repayment of the loan, all collected information is transferred to creditors as a separate file.
It is easy to guess that when receiving a loan in bitcoins, there is no question of any anonymity. The lending service will know absolutely everything about the owner of the bitcoin wallet. This completely destroys the very idea of a decentralized anonymous currency.
5. Will banks and MFIs in the future start issuing loans in bitcoins
The banking business is undergoing a major transformation of business processes. Modern means of communication in 5-10 years will transform banks from classical financial corporations into high-tech Internet companies. The trend towards the digitalization of banks is obvious: everyone is developing mobile applications, creating convenient Internet banks, approving, and even issuing loans without visiting offices. Already, the average client visits a bank offline less than 10 times a year. All interaction has moved to the Internet.
Against this background, fintech startups are already creating serious competition for banks. Including blockchain technologies in the near future threaten to deprive the dominant position in the financial services market. However, it is far from the full-fledged competition in the lending market. Most likely, it will be impossible to get a loan in bitcoins from a bank for a very long time. There are several very serious reasons why banks will not issue loans in cryptocurrency:
- High volatility of bitcoin. For Bitcoin, like most other cryptocurrencies, it has already become the norm to fall or rise during the day by 10 percent or more. The loan amount issued in bitcoins also changes by this amount. Such risks are unacceptable for large financial institutions. In addition, a sharp increase in debt in fiat is guaranteed to lead to the fact that some of the borrowers will stop servicing the debt. The example of “foreign exchange mortgages” is very indicative. The dollar has only doubled, and borrowers have already begun to write petitions to the government, hold rallies and hunger strikes, demanding to recalculate the debt at the old rate. This, in addition to direct losses due to inevitable delays, also inflicts huge image risks on banks. And if for traditional currencies a double devaluation is quite a rare phenomenon, then bitcoin is quite capable of growing 5 times in a year.
- The need to exchange bitcoin for rubles or dollars. Banks issue loans for a variety of needs, starting with the purchase of another iPhone and ending with the construction of a country house. But there is still a very limited list of goods that can be bought directly with bitcoins. This leads to the need to exchange the bitcoins received on credit for regular currency. Then the question arises, why get a loan from a bank in bitcoins, if you can take it in rubles? The exception is consumers who spend and earn in cryptocurrency. But this is a very limited circle of people, which comes down to miners and traders. And, possibly, to the participants of projects like “Silk Road”.
- The unclear legal status of cryptocurrency. This is the most important reason holding back the development and growth of cryptocurrency capitalization. Not a single state in the world has written laws that would effectively regulate cryptocurrencies. In addition to the lack of legislation, in Russia, there are no stable views of the authorities on new currencies. Until recently, the Prosecutor General’s Office and the Central Bank called cryptocurrencies a “monetary surrogate” and warned about equating the purchase or sale of bitcoins almost to the financing of terrorism. And a few months later, the president of the country, in the presence of foreign guests at an international forum, discusses the value of blockchain technology with Buterin. It is too early to talk seriously about the creation of a bank loan product based on cryptocurrencies in such incomprehensible conditions.
6. Why Bitcoin lending services are not developing
The advantages of P2P lending in the cryptocurrency have already been described above. And although the idea opens up great prospects, it has not yet received widespread acceptance. The main reason for this lies in the high percentage of non-return. Despite the complex system of verification and identity verification, the possibility of obtaining easy money attracts scammers from all over the world.
They are willing to spend money on a package of fake documents for verification and interest payments on the first few small loans. To earn a good credit history on the service, fraudsters take 1-2 credits and repay them in good faith. They take the next loan and disappear. A paradoxical situation arises, it is safer to issue a loan in bitcoins to a borrower without a reputation than to a person who has successfully closed several loans. There are no effective and efficient methods to influence the debtor.
Banks and MFOs operating in Russia have collection services and a staff of professional lawyers. These employees are the main pillar of the financial organization in the fight against delinquency and non-payment of loans. The debtor will get acquainted with the full power of the bank’s punitive services.
Taking into account Russian realities and imperfect legislation in this area, the likelihood of aggressive actions by collectors increases in proportion to the debt to the bank or MFI. Litigation and endless calls to home and work seem like a harmless trick.
And what will the lending service, which is also located in another country, do to return the borrowed bitcoins? Virtually nothing. The ability to easily take out a loan in bitcoins and impunity in case of non-payment are the main problems in the development of lending in cryptocurrency.
7. What credit services related to YouHodler.
An interesting solution for people in need of an urgent loan was invented by the creators of the Biterest.com service. This is a P2P lending service with fiat currency but secured by bitcoin. The site is intended for people who already use bitcoins and do not want to sell them. However, the person urgently needs a loan. The service works according to the following algorithm:
- The borrower creates an application for a loan, independently setting the conditions – term, rate, amount. At the same time, registration is simple and does not require confirmation of personal information. Instead, collateral in the form of bitcoin is used.
- After the creditors are found, the amount of the collateral is transferred to a special transit bitcoin wallet. Bitcoin is priced 30% less than its real value. Up to 70% of the collateral is available for a loan.
- Creditors transfer money to the specified details. If the loan is not repaid within the agreed period, the collateral is transferred to the lender.
A feature of the service is reliable protection against the scam of the site itself. The borrower transfers the bitcoin collateral not just to the Biterest wallet, but to a special multi-sig wallet. It has 3 keys that are shared between the borrower, lender, and service. To transfer bitcoins, you need at least two of the three keys. This guarantees compliance with the terms of the transaction.
All leading cryptocurrency exchanges allow obtaining a loan in bitcoins. For example, the Poloniex exchange has a lending section. It works on the P2P principle: users lend to each other. This function allows you to lend to traders. At the same time, the borrowed bitcoins are allowed to be used only for speculative operations on the exchange. The lender will receive the money-back in any case, since the exchange simply will not allow losing completely by executing a “margin call” when a trader loses his own deposit.