Bitcoin based startups like BTCJam are pioneers when it comes to offering personal loans to anyone in the world. By using cryptocurrencies, investor funds can freely be transferred quickly worldwide and at low costs. Peer-to-peer (P2P) Bitcoin lending effectively eliminates the need for banks as managers of capital. A global audience can be reached better, as expensive and tedious wire transfers are not required anymore. Both investors and borrowers should, however, bear in mind the following caveats.
The loans that are offered are either Bitcoin loans or linked loans. The former type means that the exact amount (plus interest) in Bitcoin will have to be repaid, regardless of the USD/BTC exchange rate. In theory, the loan could be worth $600 (current rate for one BTC) and well over $1,000 at its maturity. This case would place a burden on the borrower, but prices could also move against the investor. With the extreme volatility inherent to cryptocurrencies, this is not an unrealistic scenario. To counter this, linked loans are offered. Rather than loaning one BTC, $600 is then loaned and paid out in BTC. The borrower still receives one BTC, but will not have to pay back more than $600 (plus interest).
Even though there might not be any high transaction fees involved, it is still likely that the BTC will have to be converted to local fiat again before being used. Depending on the country and purpose of the loan, BTC-friendly services may be rare. Exchanging BTC for local fiat and back can, however, cost between two and six percent in transaction fees. The borrower should also be able to link the BTC rate to the local fiat currency; otherwise the borrower could still end up being exposed to, for example, local fiat/USD risk.
Credit risk is the biggest risk faced by investors. The rates matter little if the counterparty defaults or simply runs off with the money. As wallet addresses are anonymous, this does not offer much certainty either. This has led to several identity verification and credits checks to be put into place, but these are limited at best. It is possible to check a borrower’s income, but there is no way to guarantee it will be sufficient to cover the obligations. There is no insight in existing debt, which is an advantage of traditional bank loans can have (although this was not always checked either). Forcing a borrower to pay back a loan is likely to be challenging if not impossible, especially in developing countries where this type of loan can be very useful. This limits the reach of the peer-to-peer lending platform, as only the highest rated users will be trusted. Peer-to-peer lending thus might look compelling at first glance, but it is still to be found out if it can provide a durable and effective platform for funding in the long run.