Where is the Future of Online Lending?

In the year 2007, online lending began to be introduced to the Chinese market, and now it is prevalent in China. In the next few years, the online lending industry has developed rapidly and become an important part of the domestic financial industry. However, since 2014, in order to control the risk of online lending in China, the Chinese government has launched several policies, such as Ten Regulatory Principles of P2P Lending and Interim Measures for the Administration of the Business Activities of Online Lending Information Intermediary Institutions. With the gradual collapse of the online lending industry, investors are looking for a transition path.

1.   What is Online Lending?
Online lending includes Individual Online Lending (Peer-to-peer Lending) and Network Micro-credit. Peer-to-peer lending, also abbreviated as P2P lending, is the direct practice of lending money to individuals through online services, which belongs to the private lending and is governed by laws, such as Contract Law, General Principles of Civil Law and the relevant judicial interpretations of the Supreme People’s Court.
Network Micro-credit refers to the microcredit company that is controlled by the Internet corporations, which use the network to provide clients with small loans.
   Since 2007, online lending has introduced into the Chinese market. Until now, there are a growing number of P2P lending platforms and form a certain scale. Four stages of the online lending are as follows:
01.   Initial Development Period based on Credit Loans
(2007—2012)
During this period, due to lack of experience in private lending and related financial experience, Internet entrepreneurs mainly relied on credit loans. Once the borrower provided personal information on the platform, the platform would review it and gave credits to the borrower. After this, the borrower could issue an order to borrow a loan.
02.   Rapid Expansion Period based on Geographical Borrowing
(2012—2013)
Due to the full understanding of private lending, at this stage, entrepreneurs adopted the online financing and offline lending model to find local borrowers and conducted investigations on the use of funds, sources of repayment and collateral on the borrowers, effectively reducing the risk of borrowing.
03.   Risk Outbreak Period based on Self-financing and High-Interest Rate
(2013—2014)
At this stage, the online lending system template is more mature. Since the major banks in China began to shrink loans in 2013, many speculators saw business opportunities on the P2P online lending platform. They bought the online lending system template and then raised money by going online. As a result, at the end of 2013, the monthly turnover was about 11 billion, and effective investors were between 90,000 and 130,000.
04.   Policy Adjustment Period based on Regulatory Supervision
(2014—Now)
Due to the rapid expansion of the online lending platform, it has brought greater risks. The collapse of online lending platforms or the inability to withdraw cash is endless. China has increased its supervision and issued a series of policies and regulations. The illegal platform is gradually being removed, and investors are also seeking new business opportunities and persuing the platform transition.
It can be seen that in just 10 years, online lending has experienced four stages of “Initial Development – Rapid Expansion – Risk Outbreak – Strategic Transition”.

2.   Transition of Online Lending
   Since the promulgation of the Interim Measures for the Administration of the Business Activities of Online Lending Information Intermediary Institutions in 2016, the number of Chinese online lending enterprises has been decreasing. According to the incomplete statistics of the Online Loan Home, from August 24, 2016 to May 2018, the proportion of business suspension platforms, platforms difficult to do cash withdrawal, run-away platforms and economic investigation intervention platforms in the problem platforms were 66.41%, 18.34%, 3.10%, and 0.77%, respectively. Among them, there were 40 platforms made transition.
Since 2018, the public has focused on a safe, efficient, and achievable model of blockchain technology – a new online lending model called “Cryptocurrency Mortgage Loan”. And everyone has gradually discovered that this new lending model is an inevitable trend in the development of P2P online lending.
3.   What is Cryptocurrency Collateral Loan?
Cryptocurrency collateral loan is using cryptocurrency that is seen as the collateral. The borrower pledges its own digital currency onto the mortgage lending platform to borrow a certain percentage of the legal currency (RMB or other foreign currency) and promises the repayment period and interest. Lender accepts the borrower’s pledge guarantee and lends the corresponding legal currency funds to the borrower.
Lu Hua, the CEO of LBA, a cryptocurrency collateral lending company, points out that “Cryptocurrency is valuable and worthy of long-term investment, but it is a bit wasteful to put it on wallets, especially for people who need the legal currency.” And the digital currency mortgage lending platform is just able to make full use of the idle digital currency.
For example, if you want to incorporate a new company without enough circulating fund and only digital currency in your account. You do not need to apply for bank loan or sell the cryptocurrency but just need to put it on the lending platform and then exchange it back after the funds return. Taking another example, when you are going to travel around the world, you need to exchange the fiat currency of each country. However, if you have digital currency, you only need to input the type and quantity of it. Then, you can obtain the loan of the fiat currency in need, which can be USD, RMB, etc.
Talking about the practicality, the ultra-low risk of cryptocurrency pledge and efficient business process design can help lenders and borrowers to complete transactions at a lower cost.

4.   Cryptocurrency Collateral Loan VS. Credit Loan
Compared with traditional credit loan, cryptocurrency loan has its own unique advantages and risks.
01.   Easy to Operate
The operation is simple and easy to understand, and only three steps are required to complete, including registration, loan initiation and collateral payment. Most of the online lending are based on the user's credit review and real estate mortgage. The former has a large default risk, while the later is time-consuming. With the use of cryptocurrency mortgage loan, after the application, the token can be frozen to the smart contract and quickly be approved. After the approval, clients will immediately pay the money to the bank account, and the loan will take only 3-5 minutes. After the borrower initiates the loan, the borrowing demand can be cancelled at any time, and the borrowing is not required to pay any fee. Only when the loan is made, the borrower will pay the loan interest and the handling fee.
02.   Freedom of Trading
   Cryptocurrency mortgage loan uses smart contract that is completely transparent, and both lenders and borrowers can specify the terms of the loan. Besides, the contract is automatically executed, greatly reducing the risk of manual errors. In addition, the borrower can independently set the loan period and the amount of digital currency according to his or her own situation. The lender can independently assess the profit and risk of each loan and choose the borrowing demand that best suits his or her preference.
03.    Platform Security
On the cryptocurrency collateral lending platform, if there is debt default, it only needs to transfer the digital currency to the borrower. Moreover, platform borrowing is generally secured by equal or even multiple value digital currency. Even if the borrower fails to repay on time, the lender can obtain the digital currency as a collateral. In addition, because the smart contracts on the platform cannot be tampered, the risk of fraud in the lending process is well avoided.
04.   Low Interest Rates and Fees
The process of reviewing borrower credit in the traditional online lending is complicated and inefficient. To improve efficiency and reduce the risk of high default caused by unsecured and non-guaranteed loans, the use of high-interest credit lending can reduce the risk of “borrower escaping” by relying on high interest rate gains. However, the interest that the borrower needs to pay is quite high. At the same time, the focus of the credit institution will also be placed on the post-loan collection. The risk is collected by a variety of bad methods. The use of cryptocurrency mortgage now avoids the risk of “borrower escaping” while reducing borrower interest. Coupled with the automated management of smart contracts, P2P is fully realized, further reducing the fees paid by users.
05.    Premium Preservation
At the present, the value of digital currency has been on the rise, while BTC, ETH and USDT have been circulating as extremely convenient currency, which is a good asset structure as a mortgage collateral.
Under the national policy supervision and the development of the new era, the traditional P2P online lending industry needs continuous transition and improvement. Besides, the cryptocurrency mortgage lending platform is currently the best transition trend of the online lending industry. Projects currently in development in this area include Libra, ETHlend, SALT, Everex, Vena Network, etc.
The next article will further compare the current cryptocurrency collateral loan projects on the market and make in-depth analysis for everyone from the perspective of investment and commercial landing implementation.