The Rise of Crypto Lending, a Natural Progression of Peer-to-Peer Financing

Nexo

The rise of new technologies often give rise to new business models. The peer-to-peer lending space is just over a decade old and still have much to grow into. However, not long after the first P2P lender–Zopa in 2005–opened its doors, a new technology that promises to challenge traditional ways to deliver financial services emerged. […]

Nexo

The rise of new technologies often give rise to new business models. The peer-to-peer lending space is just over a decade old and still have much to grow into. However, not long after the first P2P lender–Zopa in 2005–opened its doors, a new technology that promises to challenge traditional ways to deliver financial services emerged. That technology was the blockchain, a distributed ledger that underlies the cryptocurrency Bitcoin. Since then, other blockchains have been created along with new business models to suit. As it stands in 2018, crypto lending has not made a big dent in P2P lending services, but the potential is there. This article will highlight some of the more significant blockchain-based P2P lenders, which we hope will inspire a new look at technological innovation in this space.

Think of crypto lending like you would the banking industry: Even if Capital One provided perfect products at every turn, there would still be plenty of room for JPMorgan Chase, Citigroup, and Bank of America. There would still be room for the hundreds of other banks that compete for customers.

The companies listed here are not ranked in any manner. Rather, they=se are just some of the choices available for consumers in the market for cryptocurrency loans.

1. SALT (Secured Automated Lending Technology) Lending

One of the best benefits crypto-based lending has to offer is that a lessened importance on traditional credit scores as a factor for risk assessment. SALT Lending touts blockchain-based assets as “the perfect form of collateral.” The company is using this fact to “dramatically reduce the complexity and cost of the loan process.” SALT operates under Regulation D and, in lieu of credit checks, the company does AML and KYC verifications.

Offering three tiers of product, SALT’s loans start at $5,000 and go as high as $250 million. Loan percentages run between 12 and 22 percent APR, but the borrower retains the value of the collateral currency claiming any gains and losses that happen over the life of the loan. SALT accepts Bitcoin, Ethereum, Litecoin, and Dogecoin as collateral, and funds loans in USD.

One fact that could be a significant factor when deciding to use the SALT Lending platform is that loans are not transferable on the blockchain, but through existing financial channels. Thus, they become securities.

It’s not foolish to base a good bit of faith in a company that has proven players on its team. Founder Erik Voorhees was also involved in founding several other crypto websites prior to starting SALT Lending. Among these include Satoshi Dice, which he later sold, Coinapult, and ShapeShift.

2. ETHlend

Unlike SALT Lending, Estonia-based ETHlend is a fully decentralized P2P platform built on the Ethereum blockchain for lending Ether as tokens for collateral. Some insiders fear that platforms that allow their loans to become securities might run the risk of being swallowed up by banks.

ETHlend lends Ethereum, Bitcoin, their own LEND tokens, and DAI tokens, as well as 180+ other Ethereum-based tokens. The company offers address-to-address loans that are sent within minutes, with no middle men, assuring that no one, not even Ethlend, can stop one’s lending or borrowing. The company plans to expand beyond Ethereum to other distributed ledger platforms in Q3 of 2019.

The company’s interest rates range from .25 to five percent MPR, and all transactions are carried out on digital wallets. Borrowers that transact in the LEND token can get a no-fee loan.

Announced earlier this week, Aave is a tech-based company designed to expand on the offerings of centralized fintech companies like PayPal and Coinbase. Aave Pocket, Aave Gaming, and Aave Lending (SaaS) are among the offerings this expansion adds to the platform.

Unfortunately, the service is not yet available everywhere including a block to U.S. citizens.

3. Nexo

A new kid on this block is Nexo, and being a new kid means that they are doing things in a new manner. Founded in Zug, Switzerland—even more of an “EF Hutton” mention than Estonia—in 2017, Nexo promises the world’s first instant crypto-backed loans. Available worldwide, Nexo loans start at $1,000 and top out at $2 million.

The process is an easy one.

  • Log on to the website.
  • Verify your account
  • Deposit crypto assets into Nexo wallet
  • Withdraw loan to your bank account

There will be brief pauses while the borrower is verified—the company complies with the highest AML and KYC (provided by Onfido) standards—and while your deposit is confirmed on the blockchain. Overall, the Nexo process reads like a rather quick and seamless process.

The platform loans Euros, USD, and Tether while accepting Ether, bitcoin, Bincance coin (BNB), and Nexo as collateral currency. The interest rate is eight percent if the collateral currency is Nexo and 16 percent for all others. Nexo assets are stored in multi-signature wallets, more than one multiple cryptographic keys are necessary to gain access, and cold storage (wallets not connected to the Internet) at BitGo and PrimeTrust.

4. LendingBlock

LendingBlock predicts that, as digital assets grow as an asset class, demand for hedging, swaps, repurchases, and short selling will increase. The currency crypto market has more than $500 billion in assets circulating with less than one percent used as collateral. That leaves lots of room for growth.

Touted as the first cross-chain lending platform for the crypto economy, the company promises a product that will help its customers access secure, transparent, and fair crypto-to-crypto loans. Not a lender itself, LendingBlock provides the platform upon which parties can enter P2P contracts. The company acts as agent for both lender and borrower, as well as security trustee of the collateral. This ensures that the borrower doesn’t face any uncovered credit risk to the lender.

All collateral deposits are held in cold storage. Those who think regulation will be necessary before the crypto market can fully mature can take comfort in the fact that the company is focused on becoming a regulated business. They have submitted the full regulatory application to the country of Gibraltar and await the regulator’s response. They have also begun regulatory processes with the Financial Conduct Authority in the UK, and the Securities and Exchange Commission and Commodities Futures Trading Commission in the United States.

Basing the platform on its own token (LND), which is used to make payments and receive interest on loans, allows the company to reduce the cost of exchange fees and makes it easier to manage interest payments. The use of smart contracts reduces expenses, risks, and complexity, which makes for lower costs for borrowers and higher returns for the lenders.

5. BlockFi

New York-based BlockFi might be the ideal platform for Americans who want to secure USD loans with Bitcoin and Ethereum, provided that said Americans live in any of the 44 states where the company is currently conducting business.

The attractive thing about the BlockFi platform is that it seems easy enough for a lay person to understand without any kind of financial advice. A borrower needs to meet only two requirements to qualify for a loan: They can have no liens or bankruptcies on their record, and they must have at least $15,000 of crypto assets between their Bitcoin and Ethereum portfolios.

If those criteria are met, the customer can borrow up to 35 percent of their crypto asset value, with loans ranging from $2,000 to $10 million. Interest rates go from 12 to 14 percent APR, and there is an added fee of one to four percent of the loan value. Borrowers can take a loan in Bitcoin, Ethereum, or Litecoin.

Unlike other crypto-based lenders on this list, BlockFi does not have its own coin or token.

6. Unchained Capital

Texas-based Unchained Capital could very well be the platform of choice for those who want to liquidate their Bitcoin while maintaining it and seeing it go to work in the world.

Not only is the team at Unchained Capital in the market to make money as a lender, they have an idealistic side as well. Noting that 60 percent of Bitcoin sits around and does nothing, they have a goal to circulate it and use it to strengthen the platform. The company was founded by people who believe cryptocurrencies can change the world only if they’re useful.

The Unchained Capital team has designed its personal loans to be ideal for people who are looking to make large purchases, who hope to avoid tax events, and who want to invest. Their commercial loans are geared to companies that want to free up capital, expand their businesses, buy expensive equipment, and balance their portfolios.

Unchained Capital does not have its own cryptocurrency.

7. Other Companies to Consider

The crypto lending space is expanding. New lenders seem to be popping up quite often, which means that some people in the cryptocurrency space, at least, see a market for crypto-backed lending. Despite the market having taken a downturn in 2018, rebounding from the bull run last year that catapulted Bitcoin to $20,000 in December, this space is expanding. Lately, Bitcoin has been holding around the $6,500 mark. Since the majority altcoins tend to follow Bitcoin’s price, that means the market as  whole is down, yet more crypto lenders are ambling to get in the door.

Some of the other companies in the crypto lending space that might be worth checking out include BitBond, Credible Friends, Bitfinex (a crypto exchange that facilitates crypto financing transactions between parties), Celsius, Poloniex (another cryptocurrency exchange that allows traders to lend to other users), CoinLoan, Nebeus, GetLine, and BTCpop.

Authors:

Written by Paul Keenan and Allen Taylor.

Allen Taylor

Friday May 11 2018, Daily News Digest

Volume of homes flipped with loans

News Comments Today’s main news: Robinhood raises $363M. Americans on pace to amass $4T in consumer debt by end of year. Zopa to boost regulatory clout. Reserve Bank of India regulations create P2P lending road blocks. How China struggles to create a credit scoring system. Today’s main analysis: LendingClub earnings overreaction. LendingTree Personal Loan Offers Report for April 2018. Today’s […]

Volume of homes flipped with loans

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News Summary

United States

Robinhood Aims to Rival Coinbase in Crypto With $ 363 Million Funding Round (Fortune) Rated: AAA

Robinhood, the free stock trading app, has raised $363 million in a new investment round valuing the company at $5.6 billion.

The Series D round, announced Thursday, makes Robinhood the second most valuable private fintech startup in the U.S. after Stripe, the online payments company.

Inside SoFi’s (expensive) customer acquisition push (Tear Sheet) Rated: AAA

SoFi, which recently confirmed it had 500,000 members, is on a customer acquisition push.

The company, which initially offered student loan refinancing for high-earning top-tier graduates and has since expanded its offerings, differentiates with VIP-style “member” benefits.

It’s a customer-for-life strategy other digital banking upstarts are pursuing. Luvleen Sidhu, CEO of BankMobile, recently told Tearsheet that a “customer for life” strategy is underpinned by the reality that “every customer is a potential customer,” with product offerings tailored for different life stages. SoFi has been known to pay a high price to gain customers; last year, it reportedly acquired customers at $756 apiece. The non-financial member services are valued at $795 per customer, according to the company.

Hey Future SoFi Money Member (SoFo Money Email), Rated: A

Higher interest (1.09% for May—21x the national checking account average of 0.05%!)

  • Reimbursed ATM fees worldwide (up to 6 per month)
  • No foreign transaction fees
  • No overdraft fees or account fees whatsoever!
  • Easy-to-use mobile app
  • SoFi Money Visa Debit Card
  • Mobile check deposit
  • Free checks
  • Top notch customer support
  • Send money to friends and family with easy P2P at no cost
  • Bill pay
  • Direct deposit
  • PLUS access to SoFi membership including complimentary career coaching and member events when you set up direct deposit

Did we mention that if you sign up for an account and set up direct deposit you’ll get $200?

LendingClub: Earnings Overreaction (Seeking Alpha) Rated: AAA

Such a strong reaction to LendingClub hasn’t happened in years. The company is still down 20% year to date, and more than 40% in the last twelve months. LendingClub has struggled to find its footing ever since the ouster of its CEO, Renaud Laplanche, after controversy over the parking of LendingClub notes in a related third-party firm. More recently, in the wake of Wells Fargo’s (WFC) fake-account scandal, the FTC has also charged LendingClub with charging improper fees to borrowers, sending the stock to new all-time lows of $2.57.

Source: Seeking Alpha

But with this earnings quarter – the first time in a long time that LendingClub has rallied to earnings news (in Q4, LendingClub dropped 9% after missing revenue estimates; the quarter before that, it tanked 17% for doing the same). What’s interesting is that even in this quarter, LendingClub continued a three-quarter streak of missing analysts’ revenue expectations.

How Wall Street, Silicon Valley institutionalized home flipping (Curbed) Rated: AAA

As the housing market has gone from recovering to roaring over the last five years, home flipping has also increased.

Source: Curbed

According to data provided by ATTOM Data Solutions, a real estate data provider, some 138,410 flippers invested $56 billion in home flipping in 2017, 34.8 percent of which was financed as opposed to executed in all cash. Prior to the housing bust, the same type of easy credit that infected the traditional mortgage market was also present in home flipping. At the peak of the housing bubble in 2005, more than $100 billion worth of homes were flipped by 287,929 investors, and 66 percent of those home flips were financed with loans.

Source: Curbed

Turn the Post Office Into a Bank? First Check Japan (Bloomberg) Rated: AAA

Koizumi won his fight, his party crushing all opposition in a landslide, and his plan was set in motion, though the process has taken more than a decade. The company’s initial public offering in 2015 was the world’s biggest in that year. The government still owns most of Japan Post Holdings Co., and periodically sells off shares, with the goal of eventually reducing its stake to only a third from more than half now. But privatization hasn’t shrunk Japan’s postal bank itself, which remains one of the largest and most important in the world:

Source: Bloomberg

The problem was that Japan’s postal bank didn’t just take deposits — it also lent money, including to so-called zombie companies, or inefficient enterprises that survive due to below-market-rate loans.

Bond Fund Inflows, Dollar Rally and Buyback Surge (INTL FCStone Email), Rated: AAA

Source: INTL FCStone

U.S. equity ETFs have lost $35 billion since the Nasdaq index peaked in mid-March. This is the longest stretch of ETF outflows I can remember since the end of the great financial crisis. Inflows into bond funds accelerated to $16 billion over the same time. Jumping from stock to bond funds at the first sign of volatility was a logical reaction when bond yields were falling to record lows amidst the deflationary fears of the beginning of 2016.

It makes a lot less sense when corporate earnings are soaring, when deficit-related treasury issuance is exploding, and when the New York Fed underlying inflation gauge is clocking above 3%. Last but not least, the equity selloff was in large part driven by a bond market rout that pushed 10-year yields above the economically meaningless but psychologically symbolic 3% level.

Read the full report here.

The Real Estate Lending Merger That Shook Mt. Olympus (Digital Journal) Rated: A

Zeus CrowdFunding, Zeus Hard Money and Zeus Mortgage Bank—made the switch to monotheism. The three successful businesses are now united under a single brand: ZeusLending.com.

Zeus Founder and Chief Acceleration Officer Steven Kaufman claims to have consolidated all three financing businesses into a single organization to better serve the community of real estate buyers and investors who rely upon fast, no-hassle loans to conduct timely transactions.

Federal student loans are about to get more expensive. What you need to know (CNBC) Rated: A

Although the Department of Education hasn’t formally announced the new rates, this year’s bump is likely to be higher than expected, said Mark Kantrowitz, a student loan expert.

Americans On Pace to Amass a Collective $ 4 Trillion in Consumer Debt by the End of 2018 (Benzinga) Rated: AAA

LendingTree today released its first Consumer Debt Outlook for May 2018. Americans are on pace to amass a collective $4 trillion in consumer debt by the end of 2018. Collectively, Americans owe more than 26 percent of their income on consumer debt, up from 22 percent in 2010.

Incomes growing, but consumer borrowing growing faster
Overall, the percentage of total non-housing debt, at 26 percent of Disposable Personal Income, is now even higher than during the credit boom in the mid-2000s.

Source: Lending Tree

 

LendingTree Personal Loan Offers Report – April 2018 (Lending Tree) Rated: AAA

Excellent credit (760+ score): Offered APRs to consumers with a credit score of 760+ averaged 7.35% in April.

  • The average best APR offered to all borrowers with credit scores of 760 or above was 7.35%, a decrease of 7 basis points from the prior month and 2 basis points from the same period one year ago.
  • At $22,774, the average loan amounts offered with the best APRs to all borrowers with a score of 760, up 0.57% ($130) from last month, and over 17.86% ($4,067) from the same period one year ago.
  • The top 10% of offers, presented to borrowers with the best profiles within this group, had offered APRs of 4.87% on average, and loan amounts of $33,931. A borrower with this APR and loan amount would save $2,877 by consolidating debt with a 10% APR over a three-year term.
Source: Lending Tree

Real Estate Crowdfunding: MG Capital Migrates Investment Opportunity Online (Crowdfund Insider) Rated: A

Recently, CI had a chance to catch up with Eric Malley, founder & CEO of MG Capital Management during the Crypto Invest Summit in Los Angeles. While not quite there yet, Malley is interested in the potential of blockchain.  He is looking at the options of how crypto and property can make sense for both investor and issuer.

RealtyMogul’s MogulREIT I Closes $ 4.9 Million Investments in Two Retail Shopping Centers (Citizen Tribune) Rated: B

MogulREIT I, as part of its diversified income strategy, recently completed two preferred equity investments in community-based retail centers. Community-based retail centers are centrally located within their respective population centers and focus on durable tenancy that serves the needs of the working community, thereby being less susceptible to internet retailing. The transactions include a $3 million preferred equity investment in a retail center in Waterbury, CT, consisting of three multi-tenant strips with 17 suites across 50.5 acres and a $1.9 million preferred equity investment in a retail center comprised of two lots with over 27,000 square feet located in Orange County, CA. CoStar reports that within a one-mile radius of the property, average household income is over $116,000.

Goldman Sachs, Apple Team Up on New Credit Card (Wall Street Journal) Rated: A

Apple Inc. and Goldman Sachs Group Inc. are preparing to launch a new joint credit card, a move that would deepen the technology giant’s push into its customers’ wallets and mark the Wall Street firm’s first foray into plastic.

The planned card would carry the Apple Pay brand and could launch early next year, people familiar with the matter said. Apple will replace its longstanding rewards-card partnership with Barclays PLC, the people said.

Guaranteed Rate Continues Record-Breaking Streak through April (Blobe Newswire) Rated: A

Guaranteed Rate, one of the nation’s largest retail mortgage lenders, reached $3 billion in total locked loan volume for the month of April and eclipsed records previously broken in March. In a highly-competitive housing market, the retail mortgage lender showed it’s the home purchase expert by achieving the following records: 9,387 in total locked units, $2.5 billion in locked purchase volume and 8,041 in locked purchase units.

 

Why Nationwide is ditching retail banking (Tear Sheet) Rated: A

Nationwide is shutting down its retail bank, returning to its historical core business lines including insurance and retirement; part of this plan is to invest more resources in reaching the fee-only adviser community.

The move to wind down banking operations was a strategic decision to focus on trust operations that support  retirement plans, a company spokesman said. Gaining scale and becoming competitive in retail banking would have required a “significant investment.”

Digital Lending 2.0 — A New Era (LinkedIn) Rated: A

We are now seeing an evolution of the online lending model: version 2.0. This version looks in many ways like a traditional bank, albeit a much lighter and digital one, with multi-product platforms and a variety of custom offerings for consumers. With non-traditional models like Barclays and Goldman Sachs entering the market, online lenders are either partnering up or learning from the players they sought to disrupt. In digital lending 2.0, it will be important to take an open collaborative approach, broaden offerings and deepen customer relationships through more customized solutions.

Marketplace Lending Update #3: Kabbage Heads to Court (The National Law Review) Rated: A

A recently filed California lawsuit raises the stakes in the ongoing challenge to the “bank origination model.” The lawsuit, Barnabas Clothing, Inc. v. Kabbage, Inc., was filed on March 22, 2018 in Superior Court in Los Angeles and recently removed to the federal court.1 Barnabas alleges violations of state usury, false advertising, and unfair competition laws, and asserts two federal Racketeer Influenced and Corrupt Organizations (“RICO”) Act claims. Barnabas seeks to certify a class on behalf of all California-based Kabbage borrowers and requests various relief, including that the court void the Kabbage loans.

You can do more than you think with bad credit (Inquirer Business) Rated: B

CreditCards.com, the average FICO credit score was 699 in 2016, which is just a step above fair credit. About 30 percent of Americans have poor credit, making it difficult for them to function in the financial world.

Get Creative with Loans

  • Peer to Peer LendingSince 2005, peer to peer (P2) lending has been a staple for those seeking funding with bad credit. Rather than going through an institution, you apply for and receive funds over a member-funded platform.

 

United Kingdom

Zopa to boost regulatory clout ahead of Brexit (Peer2Peer Finance) Rated: AAA

ZOPA is recruiting staff to bolster its regulatory expertise and influence ahead of industry changes and developments such as Brexit.

The peer-to-peer lender is advertising for a public and regulatory affairs officer who will be responsible for building relationships with key regulatory and political stakeholders and industry bodies.

 

Nearly Half of Aspiring Property Developers Say Economic Growth Will Have the Greatest Effect on House Prices in the Next Five Years (Crowdfund Insider) Rated: A

According to LendInvest, when asked what will have the biggest effect on house prices in the next five years, nearly half (40%) of those surveyed viewed national economic growth as having the greatest impact. Only a quarter of respondents (24%) reportedly believe political developments, such as further elections and impending Brexit, will affect house price growth the most. And a shortage in supply of housing is the biggest concern affecting house prices for only a fifth (20%) of those surveyed, while 16% of aspiring developers cited the construction of new infrastructure such as the new HS2 and Crossrail lines as the key influencing factor.

 

Goldman Sachs has invested in a UK startup that tells you when to switch mortgages (Business Insider) Rated: A

Goldman Sachs has led a £13.6 million funding round into UK startup Trussle, a company that helps people get mortgages online and tells them when to switch to better deals.

Goldman Sachs Principal Strategic Investments and Propel Venture Partners led the Series B investment into Trussle, which was announced on Wednesday.

Virgin Money offer highlights testing times for challenger banks (Financial Times) Rated: A

CYBG recently made a takeover approach of rival Virgin Money as challenger banks look for solutions in what has become a tough market; challenger banks are dealing with increased competition by digital entrants, not to mention the big four UK banks, rising funding costs and bigger rivals in the mortgage market; M&A activity among challengers is increasing as companies look to consolidate and digitize to compete.

 

 

Credit Kudos a bureau hero in open banking roll-out race (Fintech Futures) Rated: B

Credit Kudos has got connected with banks in the UK, becoming the “first credit bureau to offer open banking services to lenders and individuals”.

According to the credit bureau, borrowers can now use its services to verify income and demonstrate creditworthiness using their financial history data.

The company has now launched connections with Lloyds, Halifax, Bank of Scotland, Royal Bank of Scotland, NatWest, Ulster Bank, Allied Irish Bank, Danske Bank, and HSBC.

Mortgages shine in Castlight Financial’s open banking pilot (Fintech Futures) Rated: B

Glasgow-based Castlight Financial is partnering with Paradigm Mortgage Services and Foundation Home Loans to launch a pilot of its affordability tool powered by open banking technology.

Called Affordability Passport, Castlight says it allows brokers to process mortgages in under ten minutes.

China

China Struggles to Establish Credit Scoring System (Lend Academy) Rated: AAA

China’s government has tried for many years to establish a credit system that rivals the U.S. and Europe, but has found it a struggle to get there.

In 2015 China’s Central Bank contracted eight companies, including affiliates of TencentPing Anand Alibaba, to help build a credit system that could rival what other developed economies use. The experiment up until today has not fared well as lenders and e-commerce firms continue to use their own proprietary systems to determine risk of the borrower.

One of the main drivers behind the failure is companies were reluctant to share the data they collected. Also, conflicts of interest arose as users could be rewarded by using certain companies to drive their score up.

International

Splitit is financing purchases for debit cardholders (Tear Sheet) Rated: AAA

Splitit, a competitor to lending companies like Affirm and Klarna, is bringing its point-of-sale financing product to debit card users in the U.S. and Europe, targeting fashion and jewelry websites in particular, like Vestiaire Collective and Philip Stein.

Unlike its competitors, however, the company is focused on making the retail industry better for everyone involved — banks, processors, consumers and merchants — rather than displacing credit cards, said Gil Don, CEO of Splitit.

It might be decades before credit cards disappear, but different industries are already seeking ways to sidestep the fees that come with today’s credit card payments.

Getline ICO (GET Token): Blockchain Credit Scoring & Lending? (Bitcoin Exchange Guide) Rated: A

The GetLine network is a peer-to-peer lending platform that is built on the Ethereum blockchain. By leveraging distributed ledger technology, the objective of this project is to disrupt the lending sector, which is currently valued at a whopping $1 trillion. Therefore, transactions will be processed instantly thanks to the direct connection between lenders and borrowers. Moreover, the platform will rely on an advanced credit risk prediction mechanism, making the entire lending process safer and accessible to lenders and borrowers respectively.

 

India

RBI regulations create roadblocks for peer-to-peer lending companies (Business Standard) Rated: AAA

Is non-bank lending a form of access to credit for those in need or an investment asset class for the well-to-do? That is the question that India’s central bank perhaps grappled with while framing the regulations for the nascent peer-to-peer (P2P) lending companies.

While the regulations were put up only in November last year, a handful of companies have exited business and many others have changed tack after looking at the guidelines.

Asia

DBS Bank rolls out Singapore’s first in-app digital financial advisor that’s called ‘Your Financial GPS’ – (Business Insider) Rated: A

DBS Bank recently announced a new in-app holistic digital financial advisor which it called “Your Financial GPS”  – said to be the first of its kind in Singapore.

If you’re a DBS/POSB Bank member and have recently used your iBanking or digibank app, you might have noticed the new feature already available on the app’s main page.

Indonesia: Skystar-backed P2P lender Julo raises $ 5m Series A round (Deal Street Asia) Rated: A

Indonesian peer-to-peer (P2P) lending startup Julo has raised $5 million in a Series A funding round led by Skystar Capital and East Ventures.

Other investors that joined the round include Gobi Partners, Convergence Ventures, Provident Capital, Central Capital Ventura, Heyokha Brothers and other strategic investors, Julo announced on Thursday.

The new round of funding comes only a year after Julo raised an undisclosed amount in a seed round, also led by Skystar Capital.

Authors:

George Popescu
Allen Taylor

Why ICOs Are Necessary for Capital Fundraising

Cryptocurrency market capitalizations

Introduction In 2008, when Satoshi Nakamoto first introduced Bitcoin to the world, nobody would have thought the “virtual currency” will become such a big phenomenon in less than a decade. From being a decentralized source of sending and receiving money to any part of the world, it has transformed into a lucrative investment avenue. It […]

Cryptocurrency market capitalizations

Introduction

In 2008, when Satoshi Nakamoto first introduced Bitcoin to the world, nobody would have thought the “virtual currency” will become such a big phenomenon in less than a decade. From being a decentralized source of sending and receiving money to any part of the world, it has transformed into a lucrative investment avenue. It was trading in the single digit range in 2012 and now recently touched $5,000 for one single bitcoin. Now, startups are issuing their own currencies/tokens via initial coin offerings (ICO) to raise funds.

ICO is an unregulated channel of crowdfunding that uses tokens/coins to raise capital for the issuer. In an ICO, investors buy the coins, which can appreciate in value depending upon how successful the business is. The first ICO was by Mastercoin in 2013. It raised approximately $600,000.

The rise of ICOs can be gauged from the fact that almost $1.3 billion has been raised via ICOs by startups this year.

ICO and Equity: Similar or Different?

There are two schools of thought when it comes to ICOs. Many cryptocurrency enthusiasts feel that ICO is similar to an IPO. It sells coins/tokens instead of shares to investors and has the ability to generate lucrative returns if the business takes off. Also, just like IPOs, ICOs are restricted by the number of tokens and the duration during which the company can sell these tokens.

Many lawyers and general investors feel it is a different breed from an IPO. The main difference being an IPO gives investors a right of ownership in the company when they buy the shares whereas, in the case of an ICO, the buyer gets the right to participate and profit from the business’s ecosystem. Tokens only appreciate in value if the project takes off, but tokens do provide other additional benefits. For example, the tokens issued by Storj — a decentralized storage solution — can be exchanged for storage space on the platform. Any ICO that gives the right of ownership to investors is technically offering securities and would thus need to register with the Securities and Exchange Commission (SEC).

When it comes to regulations, ICOs basically enjoy a free run as compared to the heavily regulated IPOs. IPOs require a ton of paperwork, millions of dollars in fees, and months of preparation to ensure they are compliant with all relevant laws. Any company can launch an ICO at any stage of its life, which means investors are open to risk with regards to the legitimacy of the company.

What does the SEC Have to Say About ICOs?

So far, the SEC has not taken any serious stance against cryptocurrencies, but the growing popularity of ICOs has prompted the commission to form regulatory guidelines. In July this year, the SEC issued the results of an investigation into the ICO of DAO – a decentralized venture fund. DAO raised $150 million worth of ether from 11,000 investors and then got hacked out of $50 million worth of virtual currency. More importantly, the DAO tokens were structured as a security.

On July 25th, 2017, the SEC declared that some ICOs will come under the same regulations that are applicable to other similar investments like stocks. The critical thing to note is the ruling did not include “all” type of ICO offerings but it did include those ICOs which are structured like a security. The SEC believes “ICO may provide fair and lawful investment opportunities,” however, they can also be “used improperly to entice investors with the promise of high returns in a new investment space.”

Market Size Comparison: Bonds, Equity, and Cryptocurrency

Fixed income solutions (bonds, treasury) using traditional currency is a fully developed and functional market and has been around for many decades. The size of the U.S. fixed market is almost $40 trillion, and the U.S. corporate bond market in 2016 stood at $8.5 trillion. The U.S. equity market stood at over $25 trillion in February 2017. In comparison, the cryptocurrency market, though growing rapidly, is still a fair bit behind other developed security markets. Cryptocurrency market capitalization as of June 2017 stood at $103.9 billion with Bitcoin being the major player.

Source: FXEmpire.com

Lack of fixed income solutions

The ICO world has always been focused on valuation gains. But the real maturity of this nascent market will be judged by its depth of fixed income solutions for investors. Though many HYIPs (high yield investment programs) like GlobalBid, CryptomineHolding, and Laser were floated in the cryptocurrency market, there are still doubts over their legality. They come across more like a Ponzi scheme versus a safe investment option. The best example could be Bitcoin-Trader HYIP, which disappeared overnight.

This is where the opportunity lies for an entrepreneur who is willing to take the risk and come up with an innovative yet safe fixed income solution that will help in tying both the worlds together (fixed income solutions and the cryptocurrency market). Investors will gladly accept a solution that provides stability and security of fixed income investment solution alongside the higher returns and blockchain benefits of the cryptocurrency market.

Lending Platforms in Fixed Income

The first real breakthrough has been the emergence of peer-to-peer lending platforms using bitcoins. The technology which has revolutionized consumer and small business finance is being utilized by startups in conjunction with cryptocurrencies to offer fixed income solutions to cryptocurrency investors. Though there are not many lending platforms that use cryptocurrency, the few notable ones are mentioned below:

  1. Bitbond – Headquartered in Berlin, Bitbond is the first global marketplace lending platform for small business loans. Investors simply need to sign up with the platform and deposit bitcoins in their bitcoin wallet, then browse through the available investing opportunities. Once the project is fully funded, the investor starts to receive monthly repayments with interest until the loan matures. The repayments go straight to their bitcoin wallet. The investor can either reinvest or send the coins to a bitcoin exchange to trade it for fiat currency.
    Higher Returns – The average APR is 13%, which is pretty high as compared to returns offered by generic P2P lenders.
  2. NebeusNebeus is an online lending platform based out of the UK and was launched in 2015. It offers services in lending, trading, and remittances. Loans offered by Nebeus have a term of micro (30 days) to standard (360 days). The loan size is determined according to the borrower rating.
    Returns – Investors can expect a yield up to 12.5%.
  3. Getline – Based out of Warsaw, Poland, Getline was established in 2015. It uses a third party platform Esteemify for account verification. Borrowers and investors need to add social accounts as well personal verification details such as bank account, proof of income, etc. Total amount funded so far is 178.86 BTC and the platform usually deals in credit line loans.
    Fees – 30% of any profit obtained by the lender.
  4. BTCPOP – Headquartered in the United Kingdom, BTCPOP was founded in 2014. It is an online lending platform that also has an altcoin exchange and a share market, and it also supports IPOs, bond funding, and trading. It deals in various types of loans like custom personal loans, personal loans with collateral, instant loans, business loans, IPOs, bonds, and instant collateral loans.

   Returns – Lenders can expect an APR of 10% or more.

Conclusion

Cryptocurrencies and ICOs are redefining the concept of money and fund raising. But for a jump to the mainstream, fixed income options need to be developed for the wider investor base. P2P lending using virtual currency is a good start, and it seems a major shake up with a fixed income offering is just round the corner.

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Written by Heena Dhir.