Why Bitcoin is important to P2P lending and how can the industry improve?

P2P lending is often mentioned as an industry that could benefit from Bitcoin, and Coinbase CEO Brian Armstrong has even spoken several times about how this will be one of the key areas for Bitcoin's development. While there are now several different Bitcoin lending platforms to choose from, the industry has been plagued by low-quality borrowers who are often able to escape the lending platforms without paying back the lenders. Clearly, Bitcoin can be a powerful tool for introducing frictionless payments and permissionless access to the world's financial system, but there is still a lot of work to be done in applying some of the traditional borrower protections to these types of systems.

Bitcoin enables seamless cross-border lending
Stu Lustman, a commercial credit analyst and P2P lending enthusiast, recently explained a little about the Bitcoin lending industry via email. Before talking about the current issues in the Bitcoin P2P lending industry, Lustman briefly explained via email why cryptocurrency can be a valuable tool for this type of online financial activity. Lustman explained that Bitcoin is well suited for cross-border money transfers, which is how he first came across the technology:
“Bitcoin lending is great for diversification or cross-border lending. I discovered Bitcoin when I was looking for a way to do P2P lending with [non-US persons]. Securities laws in each country require being a resident or citizen of that country, so the only way I could lend to non-US persons was through Bitcoin.”

Problems in the current Bitcoin lending industry
Lustman believes that Bitcoin is a useful option for connecting borrowers and lenders around the world, but he also believes that there are serious problems with the Bitcoin lending platforms currently available. In his opinion, lenders are the ones who are being deceived under the current setup. Lustman explained that the lack of collection agencies is affecting Bitcoin's ability to expand in the P2P lending industry:
“Some kind of collection agency needs to be set up. It’s too easy to take someone else’s Bitcoin when there is little or no consequence for it. Identity is only a factor, as some real scammers try opening different accounts under different names, for example. I think this is a minority of cases, though.”

Lustman claimed that these problems used to be more common on bitcoin lending sites, and he also published a post on his blog about his work with the Chamber of Digital Commerce to protect lenders on such platforms.

Using blockchain to track borrower creditworthiness
Many individuals and startups are interested in leveraging blockchain for identity management, which means it’s also possible to attach people’s credit histories to that identity. If internet users start using some kind of entry in a blockchain-based system as their online identity, it would make sense to attach credit histories to those identities as well. Lustman called the concept a “great idea” via email, but he also noted:
“I still think credit scoring, like FICO does in the U.S., requires information and human interaction because strengths in some areas can make up for weaknesses in others, and you can’t program it for every situation.”

Stu Lustman will be participating in a panel discussion on Bitcoin lending at the Inside Bitcoins Conference in San Diego on December 16. Lustman claimed that he is looking forward to the panel because he will be the only American on the panel. He noted:
“It’s going to be full of insights about how businesses can get Bitcoin as capital and how Bitcoin can be used as an investment vehicle. It’s going to be great.”

Kyle Torpey is a freelance journalist who has been covering Bitcoin since 2011. His work has been published in many outlets, including VICE Motherboard, Business Insider, RT's Keiser Report, and more. You can follow @kyletorpey on Twitter.