Ever since bitcoin entered into the public consciousness over the last few years, experts and observers have struggled to make sense of what the cryptocurrency would ultimately mean to the global financial system. The consensus so far, if there is one, is that it isn’t bitcoin itself that’s likely to leave a lasting mark on the financial sector, but that it will instead be the underlying technology that holds the real revolutionary potential.
That technology, known as the blockchain, offers a distributed and trustless digital ledger system that is already turning up in new products in a wide array of industries. One of the most visible sectors that have already started to feel the effects of the blockchain is in SME finance, where a new generation of fintech startups has been making waves by providing small business loans to companies that have been traditionally underserved. Now, however, the blockchain is showing up in the realm of personal finance as well, and we may be witnessing the beginnings of a new lending revolution.
The cryptocurrency conundrum
One of the things that the early blockchain-based fintech startups had in common was that they only used the blockchain to expedite and secure the process of connecting lenders with borrowers or to create networks that utilize alternative scoring methods to determine creditworthiness. While those are laudable advances, they ignore the very cryptocurrencies that spawned the blockchain in the first place.
That disconnect is part and parcel with the fact that cryptocurrencies have faced a steep barrier to mass adoption because they’re simply so difficult to spend. That has led to a situation where investors and currency speculators tend to hold on to crypto-assets until they are ready to exchange large sums for traditional fiat currency. Also, traditional financial institutions tend to ignore cryptocurrency holdings when they make lending decisions, even if the assets are substantial enough to be meaningful in their decision-making processes.
Cryptocurrency as collateral
Now, a startup known as SALT is trying to bridge that divide by creating a network of traditional lenders that will recognize cryptocurrency holdings as a legitimate form of loan collateral. SALT, which is an acronym for Secured Automated Lending Technology, offers users a way to access spendable currency without having to abandon their investment positions in the cryptocurrency market. It’s an idea that would seem to relieve one of the major stumbling blocks to mass cryptocurrency adoption.
At the time of this writing, cryptocurrencies, in general, have been experiencing a roller coaster ride as volatility and wild price swings have dominated the market. That instability is one of the reasons why traditional lenders have been hesitant to consider crypto-assets as collateral, as well as why borrowers are hesitant to cash out – fearing missing out on enormous gains. With SALT as the middleman, both sides of the transaction have assurances in the form of an Ethereum-based smart contract that enforces the terms of the loan, regardless of the underlying asset’s fluctuations.
A promising start
As SALT has been operational only since late December of 2017, it’s hard to say if it will have staying power, but there are already signs that it will. By February, the platform had already made $23 million in loans and had another $1.3 billion in pending requests. If nothing else, that proves that there is a healthy appetite for cryptocurrency-backed loans within the market. As cryptocurrencies continue to gain acceptance around the globe, and as businesses continue to integrate them in their payment processing systems, there’s every reason to believe that SALT may represent a paradigm shift in lending that we’re only beginning to see. If that’s the case, it looks like the financial sector is about to face its second major blockchain disruption in less than a year – and it probably won’t be the last.
To learn more about how the blockchain is already upending the financial sector, read Fintech Startups Look To Displace Banks In The SMB Lending Market.