NewsBTC: You have created a unique product, which at the moment has virtually no competitors on the market: a system for lending using blockchain technology. Tell us about it.
Vladimir: Our credit token really is a revolutionary product. It stands alone against the background of what we’re doing with our main token. You could say that our major contribution to the development of the blockchain community is comparable, for example, to the Commit project that TenX recently presented. What we’re doing with the help of our technology should create an entirely new lending format. Nothing similar has ever existed anywhere, either before or since; this system can only exist due to the existence of blockchain.
Please explain how it works, and what are the potential pitfalls of this system?
Today we’re seeing an extremely active development of peer-to-peer lending, i.e. a system of lending in which unrelated parties make loans to each other directly, without traditional financial intermediaries. Services are appearing that allow one person to take out a loan from another person at a specific rate, peer-to-peer lending exchanges are appearing, and there’s really quite a number of these solutions – it’s a growing segment. But if you look at blockchain, which should become an important stage in the development of lending, here there’s no lending yet. No one has yet thought of anything worthwhile because they are all working in different legal spaces.
What’s the danger of that?
There’s one very important thing about today’s peer-to-peer market: that’s the risk of a one-hundred percent loss of the lender’s capital. Imagine that a very reliable, the proven person has borrowed money from you, and the next day his son gets into an accident, or he loses a bundle at the casino… From a good borrower with a solid reputation, he turns into a person who can’t pay his debts. Of course, you could make attempts to recover your money, but exchanges don’t usually get involved in this, and this task falls to the creditor itself.
In other words, it works out that the borrower bears no responsibility at all?
Exactly. Of course, somewhere it will be written down and recorded that he’s a bad guy, but he bears no actual responsibility at all. For example, if he’s from Indonesia, go ahead and try to prove to them there that you lent him some coins or bitcoin. This is why the main challenge that we encountered was to take the risk away from the lender.
Have you come up with a way to do so?
Yes, and it’s blockchain-based loans. This solution has huge potential for the so-called “unbanked” audience – people who for various reasons don’t use banking services but do want the ability to take out loans. We need to bring them into a kind of decentralized space, and learn to make the right assessment of these people. On the other hand, people need cryptocurrency right now in order to make transactions. Blockchain-based loans allow all of this to be done in a decentralized way and make it possible to serve the entire audience worldwide at once.
And how do you see the future for your credit token?
When we had just come up with the model of the credit token, we simply couldn’t believe that everything could be so beautiful. We carried out an extended analysis and we understood that the project we’d come up with was very similar to the appearance of the dollar, to the model of its first distribution. Do you remember, when the world changed over from the Genoese currency system to the modern financial system? The working logic of our credit token is such that it does not involve trading on exchanges; it exists to realize the goal of lending, and possibly in the future we will give other banks the opportunity to use this technology as well. At the heart of this token there are three participants: the bank, the borrower, and a party that you could call the passive lender (we call them credit token holders). There will be a fairly large number of both borrowers and token holders.
Let’s try to explain this using a specific example.
You need a loan, so you come to us. We find out everything about you as a client, we integrate with the credit bureau, we look at how you have taken out loans and how you’ve repaid them, we analyze the information, and understand how many credit tokens we can issue to you. For example, a thousand tokens. At the same time we see that on the exchanges where the credit token holder is at, the exchange rate is 1 dollar per token, for example. Relying on this, we issue you 1,000 credit tokens. Now what can you do with them?
Well, for example, sell them and exchange them.
Absolutely right. There’s only one reason you have them: you need to turn them into money. Because you came looking for money, and all we gave you is tokens, but we explained that you can sell them to a specific lender on the exchange and receive 1,000 dollars, and if you don’t want to or can’t sell them there at an exchange rate that suits you, you can return them to us within a week at no interest.
And if we’re talking about longer than a week? What does the process of repaying the loan look like?
On the exchange, everyone sells tokens at various rates. You come in, choose the rate that suits you best, buy some tokens and return them to us.
What role do credit token holders play in all this?
At the time when the tokens are bought from the so-called passive lender, he or she confirms the borrower’s liabilities to the cryptobank and de facto becomes the owner of these liabilities. However, it’s all the same to them who the borrower purchases credit tokens from when they come to repay the loan…
Let’s look at this aspect in more detail. What’s the benefit?
It’s very simple. The lenders don’t risk losing the money that they gave to the borrower, since even if the borrower doesn’t come back to them, there are another 500 people who will show up with their liabilities to return loans. They come to the exchange in order to buy up tokens in just the same way and give them to the bank. People come to the token holders because they are the only ones who give them the ability to settle with the bank. Without a token, nothing works; take it away, and the system grinds to a halt. It maintains the system, is the exchange unit in this infrastructure, forms the value and the scope of liabilities, protects creditors, stores information on each borrower, etc. When we arrived at this, we understood that the dollar itself once arose using approximately the same model. In fact, it was lent out to a large number of people, and a deficit was created, when the amount of the issue was less than the financial obligations taken on by people. We’ll become the dollar when we allow other banks to issue tokens under our own rules, and also to use our single centralized exchange at our rates.
But what should a token holder do if their value falls? How can it compensate for the difference?
Token holders do not risk losing their capital. We balance the value of tokens: if we see that it is growing less than 50% per year on average, then when the borrower takes credit tokens, we set a lending rate. That is, for example, the person takes 1,000 tokens but has to repay 1,010. If we introduce a lending rate, this means that the number of financial liabilities taken out is greater than the emission. Roughly speaking, we are owed a million dollars, but we’ve only issued loans for 700,000 – this also balances out the value and demand on these lenders.
Tell us, how do you identify and review your clients?
When someone comes to us, they fill out a special form, we learn their main details, passport and so on, then we identify the client and create a credit rating based on a points system. If the person gets a high number of points, then depending on this we decide what loan to approve for them. When we issue tokens, we put lenders at risk, and our job is to protect them, because if we issue bad liabilities, then the income that lenders get on their tokens falls.
Who do you ask about a borrower’s credit history?
There are something like 20 international credit bureau services, and we have already begun communications with some of them. They give out ratings. We also plan to work with the guys at MicroMoney, and they promise to provide the ability to create a credit rating even for those people who don’t have any appreciable capital.
What credit limits will you have at the first stage of operations, and what are your goals going to be for say the first five years?
The first goal is to create statistics. That is, people should get a reputation. There’s not much of it yet in this format. Of course we will have limits, both for specific countries and limits based on the results of client identification. If you’re talking about figures, then we probably won’t be securing loans for large amounts like 50,000–100,000 dollars. It would be quick lending, up to 5,000–7,000 dollars. At the start it’ll only be 1,000–1,500 dollars, so that people can borrow and confirm their reputation.
Which countries will be affected by lending limits? And could there be a situation where people in one country have access to your bank, and say in the next country over they don’t?
Tokens will be available in all countries where we have the ability to identify the client. Ideally, we’d like to have agreements with local credit bureaus, which cover a fairly broad audience. In addition, we also study social networks, perform a behavioral analysis on the client, and on this basis we create a trust index for them. As for countries with a limit on making loans, we’re talking about those states where there are capital restrictions. Indonesia, for example.
What kind of terms are you planning to lend for?
Loans will be fairly short-term, up to three months at the beginning.
Will the credit token holder determine the rate?
Yes, but we regulate the maximum cost of a token on the exchange. We give people the opportunity to earn income, and we protect their interests through regulation, so they don’t lose money.
Let’s talk a bit about lenders’ security. How are you going to carry out collection work?
Today banks have this common practice, which works in the regions: it’s collection call-centers. Our business can be regulated, and its main goal is to ensure income for lenders. Of course, we will work on the issue of default, but it’s not as scary for us as it is for a bank, because banks that are engaged in attracting funds are also tasked with securing them. In our case, due to the fact that growth of the token may reach 50% per annum, we can allow ourselves a default rate on the order of 15%, and at the same time no one is subject to risk. Lenders will continue to earn, we will continue to issue loan liabilities in credit tokens, and borrowers will continue to receive money. The main thing is that no one will lose anything.
What would you estimate is the current size of the credit token market, and what do you forecast it will be over the next three to five years?
Analysts forecast that in the next three years the audience of owners of cryptocurrency will increase to 500 million people – that’s quite a lot. Even 1% of this audience means 5 million potential customers for our services.