I think crypto currency has a little way to go before true peer to peer lending is realised. Normally the regulatory burden in relation to lending is to afford protection on both sides of the contract, and will be backed up by statue. A smart contract might limit the lenders risk, for there will be limits to the types of collateral that can be wrapped inside them, and the fact that collateral would be required will also act as a drag on the wider adoption of them. How would a US lender enforce a contract on a Chinese borrow for example. Also you have the problem of due diligence which is a problem that cannot be easily solved by the blockchain.
Nosajj, I like your comment. Indeed regulation is for protection. Decentralized lending can work within regulation as well. I think this is more of a question of adopting technology that is way more advanced than the current banking system. Currently there are jurisdictions where centralized p2p lending is regulated, and jurisdictions where it is not. Factually I do not see a regulatory an issue when it comes to decentralized lending. I would like to link this to the Due Diligence (KYC, I presume) question. As a person with legal background, I have followed the discussions on legal conferences etc. about KYC and the issue of how it could be adopted in blockchain. However, I noticed that many discussions are related to what is KYC and the compliance behind it. No one proposes any workable solution. Maybe that is the nature with the legal people. We tend to find risks, not solutions. Factually, in my opinion KYC is quite easy to perform on decentralized environment. There is no restraint for me adding a link to data which contains DD material or filling up a questionnaire for review. The data could be even stored with Storj which would be decentralized. This how easy KYC really is. Moreover, thresholds (such as the loan amounts, new borrower, changes) could be added to alarm when KYC is required. We legal people always over analyse things due to the fact that we need to find risk and comply with the risk. Yet we do not usually provide the solution on how to achieve it. On the contractual issue and enforcement of the loan agreement: the easiest way to approach the question is to ask, how would it be done in centralized environment? You do not pay me, I will enforce the payment, what do I need? A contract. Contract or contractual relationship between the lender and the borrower can be established via Terms and Conditions between the lender. This would become a binding contract and can be enforced (of course some jurisdictions might require handwritten signature or even a notarization). However, if we do not know the counter party that could create an issue (of course if KYC'eed, not the case). Therefore, what actually Smart Contracts can perform is the security or create trust on the decentralized lending. This means that by using a collateral such as ERC-20 token or ENS domain, the lender can fund loans that are could regain the loss of capital on default. Therefore, we would not need to escape on centralized enforcement of the loan contract, since the lender can simply sell the token or auction the domain name to regain losses. I agree that wider adoption is limited due to collateral. However, reputation system can be used to borrow as well or self-sovereign identity for unsecured lending. I think the adoption is subject to the development on crypto/token economy itself, of course since decentralized lending needs decentralized economy.
I think that the concept itself will definitely be realised, but further down the road. As we move to bio metric and cloud based ID identification, it will be easier to perform the due diligence as it will just be reaching out to an API. What I still think will be the biggest stumbling block will be enforcing the contract, as different jurisdictions have different rules in relation to contract law. For instance which jurisdiction would be responsible for the dispute process, the buyers or lenders. I think the next step for p2p lending will be to mature the technology and processes within one jurisdiction because the above issues simply will not apply. The greatest test for the people around this industry will be to find out how they can scale that cross border in way that ensures confidence for both the borrower and lender.
I agree. The enforcement is difficult. That is the reason ETHLend uses collaterals such as ERC-20 tokens or ENS domain, to regain any defaults. We are introducing unsecured lending as well based on reputation. Would be great to solve the enforcement issue if lender wants to regain the lost loan capital. I think going jurisdiction by jurisdiction is not the right way. On the bio metric, I had lot of research on it, there are still some security isses, for example if one leaves fingerprint or shows a thumb on a picture, it could be compromized, some hybrid system would definitely work. Now we are keeping the ethlend so that enforcement is not necessary due to the collateral. However, once secured loans are in place, we definitely should consider how to enforce the defaulted debt.