Singapore and Switzerland are joining forces to bring crypto lending to East Asia.
Cadence, a Coinbase-backed alternative investment provider, launched a blockchain-based investment platform for debt.
By launching its private credit investment platform, Cadence aims to bring more transparency and efficiency to the asset class in order to help companies grow their businesses. Cadence turns commercial debt into digital tokens that can be traded on its platform.
Private credit, or private debt, is a type of alternative investment which has only been accepted as a separate asset class very recently. Private debt investments are not backed by banks and are not issued or traded in an open market, and are used to fund business growth and provide working capital. Citing data from the Alternative Investment Management Association, the press release notes that total global assets in private credit are expected to reach above $1 trillion.
Cadence’s founder and CEO, Nelson Chu explained that the securitization market for private credit has been in “desperate need of innovation.”
The company, which has been recently listed on the Bloomberg Terminal, intends to contribute to the growing asset class by offering its digital securitization technology to expand private debt investments for institutional and accredited investors.
Securitization is the process of establishing a financial instrument that merged from various financial assets into one group.
According to the press release, Cadence is backed by major United States crypto exchange and wallet service Coinbase, having raised $2 million in a funding round co-led by the exchange’s investment arm Coinbase Ventures earlier this year.
Cryptocurrency loans firm Nexo says it will accept the gram ICO token from messaging app giant Telegram as collateral.
HSBC has deployed tokenization tech in its receivables infrastructure for corporate clients in India.
The British multinational financial services company has reportedly launched its Digital Accounts Receivable Tool (HSBC DART), based on tokenization technology developed by Australian blockchain-powered Fintech company Identitii Ltd., the firm said in the announcement.
According to the statement, HSBC DART was developed for HSBC’s Global Liquidity and Cash Management (GLCM) business and deploys Identitii’s approach to tokenization within HSBC’s existing infrastructure of receivables to enhance involved processes.
The instrument is designed to automate the accounts receivable (AR) process for HSBC’s corporate customers and their network of buyers, enabling a secure communication layer between network participants and reducing manual work such as invoice payments documentation. Accounts receivable is the balance of money owed to a firm for services or goods provided or used but not yet paid by customers.
In the announcement, Identitii revealed HSBC’s plans to expand HSBC DART in new markets in Asia.
Originally founded in 1865 in British Hong Kong, United Kingdom-based HSBC was the 7th largest bank in the world by 2018, and the largest in Europe, with total assets of about $2.6 trillion. In mid-March 2019, HSBC was reported to be seeking banking partners in South Korea to deploy the blockchain platform Voltron.
Previously, HSBC reported that implementation of blockchain tech in its forex trade settlement reduced costs of operations by 25%.
Blockchain startup Spring Labs recently raised $23 million in Seed A funding round, says funds will go towards security products built on its Spring Protocol blockchain platform.
Spring Labs will purportedly use the funds to improve its blockchain-based platform Spring Protocol and develop three new fraud protection products that are designed to combat fraud in the auto financing sector.
According to the press release, the new products are Spring Verify, Spring Defense, and Spring Protect, which are designed for identity verification, fraud monitoring/mitigation, and loan stacking prevention, respectively.
The products will purportedly provide information to lenders anonymously, for the purpose of financing activities such as unsecured consumer lending, small business lending, credit card issuance, and secured auto lending.
According to the report, auto financing fraud has nearly quintupled from 2011 to 2018, purportedly becoming a relatively easier way to commit fraud as other credit options become more secure than auto lending options.
The report estimates that industry losses range between $4–$6 billion each year, largely due to auto credit established with fake ID credentials. Somewhat like a clone firm scam, Spring Labs says that scammers will typically mix in some real information along with the fake, in order to establish falsified credit accounts.
Among the investors for this seed A funding round were Galaxy Digital, the cryptocurrency investment bank founded by crypto enthusiast Michael Novogratz, and automotive giant General Motors (GM).
As previously reported by Cointelegraph, GM announced that it was joining the Spring Founding Industry Partners (SPIF) Program in February. The SPIF is reportedly a project launched by Spring Labs which aims to provide security solutions through research and collaboration.
Chief strategy officer at GM Mike Kanarios commented on GM’s decision to join the project as a partner, saying:
“As the captive finance arm for General Motors and one of the world’s largest auto finance providers, we are continually innovating and evolving our fraud prevention and detection capabilities to better serve and protect our customers and dealers.”
Cryptocurrency asset management company BlockFi announced that it has opened interest-bearing accounts for the gemini dollar.
Per the announcement, GUSD deposits will see a yearly yield of 6.2%, paid in the stablecoin in question. BlockFi notes that it also offers GUSD as a U.S. dollar funding option and as collateral from institutional cryptocurrency borrowers. BlockFi CEO Zac Prince commented:
“The implication of adding this functionality is that you could see crypto companies like BlockFi compete with traditional fintech challenger banks by taking advantage of assets like Bitcoin for on-ramps in to a dollar-based blockchain financial ecosystem.”
BlockFi notes that the accounts will not be available to United States-based customers due to a lack of regulatory clarity surrounding stablecoins backed by fiat currency. The firm states that it is working with legal counsel to add support for U.S. clients later this year.
Some in the cryptocurrency industry have criticized BlockFi, as its terms and conditions allow it to determine the interest rate each month at its sole discretion. David Silver of Silver Miller Law firm said the firm does not advertise what it guarantees, which could be confusing for users.
In March, BlockFi decreased the interest rates for its top tier bitcoin and ether accounts. In May, the lending platform further lowered interest rates for some of tis ether accounts as the lending environment for ether had purportedly floundered.
Blockchain-based lending platform Bitbond says its security token offering is the first to be approved by a regulator in Germany.
Shinhan, one of the oldest and largest banks in South Korea, is using blockchain technology to speed up the approval process for loan products.
Shinhan Bank introduced its blockchain-powered lending platform, allowing clients to get loans without face-to-face interaction.
Shinhan Bank’s blockchain-powered loan system intends to boost cost and time efficiencies in the lending process, reportedly enabling the public to apply for loans online and get their credits without face-to-face interaction.
According to the report, the new system is the first initiative of its kind introduced in South Korea.
Specifically, Shinhan Bank’s new lending system applies blockchain technology in the verification and confirmation processes within the network of affiliated institutions and banks. The system allows the parties to register and operate in the network using an encrypted one-time password, enabling easy and instant access to the data necessary for the approval and issuance of loans.
A Shinhan Bank official reportedly said that the recent application of blockchain technology is a part of the institution’s attempts to provide remote services for clients. He added that the bank will continue to develop innovations with remote access as well as products to expand accessibility.
As the second-largest commercial bank in South Korea, Shinhan Bank has been actively embracing blockchain technology over the last year. In late 2019, the bank was reported to be implementing blockchain in internal processes in order to reduce the risks of human error. Previously, the bank also reportedly implemented interest rate swap transactions based on blockchain.
Recently, a group of four banks have successfully issued a blockchain-based type of a legally binding loan agreement called a promissory note. The system reportedly reduced the steps necessary for issuance the note by over 50%.
Decentralized credit and loans: better for borrowers and better for the economy.
In the feverish quest to decentralize anything even remotely open to decentralization, one of the most promising areas is finance and the financial industry. This shouldn’t be too surprising, given bitcoin and the origins of blockchain technology, but at a time when even babies are being put “on the blockchain,” the emergence of decentralized finance (DeFi) provides welcome proof of crypto’s real utility and applicability.
And while DeFi is covering a wider range of areas — from remittances to derivatives and investments — its most promising sector involves credit and lending. That’s because, thanks to the openness, security and transparency of blockchains, it’s possible to make loans and credit available to a larger pool of people than ever before, while the interoperability of blockchains opens up the possibility for creating a spectrum of new lending products and services.
But even though the sector has expanded considerably over the past year or so, decentralized finance still needs to put in plenty of work before it can compete with legacy financial systems. At the same time, users need to be careful when using early stage and untested DeFi platforms and services, just as they need to be aware that not all DeFi systems are truly decentralized.
The big decentralized lenders
DeFi might be a relatively new and ill-defined term, but its meaning is simple, referring to the use of blockchains, cryptocurrencies and/or smart contracts in providing financial services to clients. And when it comes specifically to loans and credit, there are numerous platforms, services and companies that are harnessing decentralized ledger technology for the purposes of lending services.
The most well known of these is MakerDAO, which lends its stablecoin — DAI — to users, who gain their loans by depositing ether (ETH) with the Maker system as collateral. According to the recently launched DeFi.Review website, it’s the biggest decentralized finance platform by a comfortable margin, having roughly $508 million in ether locked up in its platform. Behind it is EOS REX, which has deposits of EOS worth around $437 million, and which lends to users who want extra EOS in order to stake the cryptocurrency for extra CPU/NET bandwidth on the EOS blockchain.
Both of the platforms above are infrastructural, in that they serve primarily to support crypto economies and ecosystems — be this the EOS blockchain in the case of EOS REX or various cryptocurrency markets in the case of DAI. As such, they arguably don’t satisfy the common sense or traditional definition of lending and credit, given that they aren’t awarding loans to the general public. Meanwhile, the fact that they both account for approximately 86% of the total amount of assets locked up by DeFi platforms (according to DeFi.Review) is an indicator of how young the sector still is.
Why lending is better when it’s decentralized
Nonetheless, as young as DeFi lending may be, there are many other platforms besides MakerDAO and EOS REX that are offering credit via decentralized means. Launched in September 2018 and having around $42.4 million locked up, Compound is a decentralized money market where you can lend your own stores of crypto in order to earn interest, while the peer-to-peer lending platform Dharma was launched in April and has roughly $23.91 million locked up, either as ether or DAI. On top of this, there’s a long list of competing platforms, including Cred, BlockFi, Lendoit, SALT, NUO, ETHLend and Colendi.
Another one of these new DeFi lending platforms is Bloqboard, which lets users borrow or lend a range of crypto assets on the Ethereum blockchain, from Wrapped Ethereum to BAT, ZRX and DAI. Its dashboard is fairly simple, with visitors being able to choose to borrow or lend any supported crypto and with them being presented with the variable interest rate they’ll benefit from or have to pay. It also enables customers to use Ledger or MetaMask to interact with the Ethereum blockchain and track their transactions. And as Bloqboard’s head of growth, Nick Cannon, explained to Cointelegraph, such transparency is a big part of the reason why decentralized lending and DeFi more generally is likely to take off.
“DeFi brings magnitudes greater accountability and transparency to investors making for a healthier financial system. These products will broaden access to sound financial investments no matter what geography you reside in.”
On top of greater accountability and transparency, decentralized finance will also bring the benefit of greater security for users and their funds, something pointed out to Cointelegraph by Guillaume Palayer, a co-founder of decentralized crypto asset management platform Betoken.
“The main advantages are the control, security and permissionless nature offered for the end users by DeFi products,” he said. He went on, saying:
“Permissionless because everyone can access it without conditions and independent of your local financial system’s health. Security and control because the vast majority of DeFi products are non-custodial and offer the option to opt-out of their service with a simple transaction.”
As both Palayer and Cannon suggest, the decentralized and geographically nonspecific nature of blockchain means that DeFi lending is more open to a wider market of customers than centralized alternatives. But in addition to this, decentralized lending is more open in a financial sense, and for two primary reasons.
First of all, most blockchain-based credit platforms don’t actually require users to have a good credit score or even a credit history, with many covering the risks they take on by requiring collateral — often in the form of crypto — from borrowers (as in the case of MakerDAO, for instance).
“With a decentralized loan, you’re not dependant on having access to a credits system and you are able to customize the duration and the cost of the loan however you want,” Palayer explained. “As far as I know, no centralized loan providers offer this kind of advantage in a trustless fashion.”
“As long as you have crypto assets, you can immediately borrow cash that is delivered straight to your local bank account.”
Nexo claimed to have issued $300 million in loans to over 170,000 users in the seven months leading up to March, while Trenchev also reports that the use of blockchain and crypto-based collateral means that loans can be made extremely flexible for users, both in terms of the amount borrowed and in terms of the conditions attached to lending: “There is no fixed repayment schedule, no strict maturities. As long as you have sufficient collateral to secure your borrowed funds, you have the flexibility to repay your loans at any time with cash or crypto assets.”
Secondly, in many cases, the decentralized, blockchain-based nature of DeFi lending systems allows companies to offer credit at a lower cost, something that obviously makes obtaining loans more affordable for a wider group of people. “Borrowing and potentially the costs of payments in distributed systems are lower,” Alexey Ermakov, the CEO and founder of decentralized payment apps Aximetria and PayReverse, said. He continued:
“Among other reasons, this is due to the fact that in the case of blockchain-based credit systems there are no compliance costs and/or they are significantly lower, and costs are also lowered by the ability to make electronic mortgages and provide loans on the basis of smart contracts.”
Feeding into the openness of decentralized lending platforms is the burgeoning area of blockchain interoperability and atomic swaps, which promise to give users more options when taking out loans or lending crypto.
“Another huge advantage that stems from DeFi’s permissionlessness is interoperability,” Palayer said. “You could take out a DAI loan from MakerDAO and convert it to Ether using Uniswap or Kyber Swap to gain leverage. The possibilities are endless, and we feel everyone should be excited about this.”
And from a more general and macroeconomic perspective, the increased openness and accessibility of decentralized loans should result in higher productivity for the global economic system, as outlined by Cannon:
“As the market matures, decentralized lending services will source more ‘dead capital’ from around the world.”
Put differently, blockchain-based loans will have the effect of putting “dormant” crypto to work in the wider economy, with hodlers having the opportunity to borrow or lend without ever renouncing the underlying ownership of their cryptocurrency.
“Many have been purchasing cryptocurrencies as a very long-term investment, expecting their value to grow hundreds even thousands of times,” Trenchev explained. “Naturally, such investors do not use their crypto for payments. They do not trade it. They simply keep their assets with the expectation of having exponential returns by just holding.”
Future challenges and future promise
There’s little doubt that the world of blockchain-based lending is a tantalizingly promising one, but the fact that it’s still in its infancy should give potential customers and the industry more generally pause for thought.
First of all, the vast majority of DeFi platforms are still untested and in development, and as SALT’s head of product, Rob Odell, told Cointelegraph, this means that users should be careful when choosing a service:
“Be vigilant about researching your options,. For all its advantages, most DeFi applications are still very new — they need time to work out all the kinks and be battle tested.”
Odell also noted that users should consider “how limited the offerings of some of the DeFi loan products can be. For example, right now, MakerDao only works with Ether,” and while MakerDAO is (like certain other platforms) planning to add more cryptocurrencies in the near future, its current limitations are one indicator of how much distance DeFi has to travel before it can compete on the same level as legacy systems.
As with pretty much every area in which blockchain technology is being applied, education will be one of the first key areas in ensuring that DeFi can expand, mature and realize its potential. “There are a number of challenges but I think education is the greatest,” Jeremy Lam, product lead at OmiseGo, a finance-oriented scaling network for Ethereum, said. He added:
“DeFi platforms will often require the capacity of the individual to be in control of their own private key. I don’t think most people are ready to handle such a responsibility. Also related to education, we have to consider who is using DeFi services. How do we protect people with insufficient financial knowledge from losing money on products they don’t understand?”
One thing that potential users need to be educated about is that some DeFi platforms will be more — or less — decentralized than others, something that could potentially put them and their money at risk. “A Service provider needs to fulfill certain conditions to be a true DeFi service,” Stani Kulechov, the CEO and co-founder of the Swiss-based AAVE, which runs the Ethereum lending service ETHLend, warned. He went on to say:
“First and foremost, ensure that the service provider does not hold your assets. This means that there must be a smart contract that holds the funds and secondly ensures that the transactions are conducted via smart contract and not through a third party signing. You should choose DeFi projects based on transparency and track record.”
More fundamentally, decentralized lending won’t succeed and make significant headway until the industry pinpoints — and builds itself around — gaps in the credit and loans market it’s well-positioned to solve. “As mentioned, education is a large challenge,” Lam said.
“The other huge challenge is to properly understand what problems DeFi is trying to solve and onboard the users that are experiencing that pain.”
And while there is certainly a demand for loans that don’t require a credit history, the fact that most no-credit DeFi platforms ask for crypto as collateral would mean that the success of such platforms is predicated on the general and widespread adoption of cryptocurrency.
And while we certainly haven’t yet reached the “widespread” adoption of crypto, there is some indication that adoption has increased in recent months, with around 9% of Americans now owning bitcoin (according to an April self-selected survey from Blockchain Capital), compared to only 2% in November 2017. There is, then, genuine hope that the DeFi sector will capitalize on this growth, with figures belonging to this sector confident that it will overcome its challenges and make good on its potential.
“I’m very confident about the tremendous ecosystem’s growth we could witness in the next coming years,” Palayer affirmed. Similarly, Odell said, “While it’s still very early, decentralized finance will eventually be the norm if the promises of transparency, openness and access are fulfilled by these solutions.”