The Bitcoin Lenders’ Bill of Rights

 

The 3 largest Bitcoin based lending sites: BTCJam, BitLendingClub aka Loanbase, and Bitbonds, combined originate around $1.5 million worth of Bitcoin based loans per month. While this number is small, the industry is fast growing and is an important part of developing the Bitcoin ecosystem as a whole as lending/investing alternatives for Bitcoin operating companies and access to capital for those companies are vital to their and the ecosystem’s success.

There are 4 primary constituent groups served by the Bitcoin lending sites. They are:

Borrowers: Those that borrow on these platforms for acquisition of mining equipment, building a business, trading or whatever other purpose.

Lenders: Those that lend their own coin to help the borrowers and earn interest in Bitcoin. This is you and me.

Platforms: The lending platforms themselves, almost all of which are 2 years old or less, currently.

The Bitcoin Ecosystem: There is overlap here with some of the other 3 categories but the entire ecosystem is able to influence and benefit from peer lending platform successes.

Of these 4 groups, the most vulnerable group is the Lenders. They are the ones that need the most protection and help and benefit the most from improved industry standards overall. Greater lender trust and protection means more Bitcoin available to lend for any and all purposes, especially to help new growing operating companies.

I am working with the Chamber of Digital Commerce, a great organization, and propose a Lenders’ Bill of Rights that incorporate the standards we would like to see all the main Bitcoin lending sites adopt. Here are 10 rights that Lenders have or should have that incorporate online lending best practices.

Lenders’ Bill of Rights

Lenders have a right to know exactly to whom they are lending their coin. This can and should include disclosures and information shared by the platforms at a general level, with more specific information given as required and when payment issues come up on a loan. This should also include re-verification every 6-12 months since personal and economic conditions for individuals and businesses are constantly changing. Names, Cities of origin and city of login and nation of citizenship should all be included here.

Lenders have a right to know that borrowers have gone through strict verification, anti-fraud and KYC/AML to limit the negative consequences for the coin they are lending out. Passports are a recommended form of identification.

Lenders have a right to expect some kind of collection process in place including local partnering on the ground in many countries like Kiva does for its loan selection process. With no real collection process, there is little to no consequence for non-payment other than the borrower’s word.

Lenders have a right to know if borrowers are connected to each other like 2 partners in a business or a husband and wife borrowing under separate profiles since their personal and economic fates are linked together. These should be known by the platforms through their due diligence and disclosed to lenders.

Lenders have a right to accurate statistics about loan performance, defaults, originations and overall platform health since platform risk is very real. Funding announcements are one important way to gauge platform health since development and compliance costs are high.

Lenders have a right to regular reporting of their loan activity so they can track the necessary information (Interest, Capital Gains/Losses) for tax purposes in their home jurisdictions.

Lenders have a right to expect reasonable loan limits placed on borrowers based on Income, Verifications, previous loan performance and other factors.

Lenders have a right to a fair and accurate reputation system that lets them screen borrowers and does not include current features like letting late payers/defaulters negatively rate those that question their pay history. Reputation should be based on experience and pay history.

Lenders have a right to expect that the platforms are in compliance with all home government jurisdictions that apply to them whether that is FinCen or SEC (US) or FCA (UK) or otherwise. Upon request, this information should be made available to lenders.

Lenders have a right to expect fair and equal treatment from the platform whether they take advantage of additional features like AutoInvest or not.

Conclusion

Bitcoin lending sites are at a crossroads. They can work to adopt some industry best practices, many of which are adapted from the fiat peer to peer lending world, and experience the same levels of growth, profitability and acceptance that Lending Club and Prosper have enjoyed. They can also go the other way and fall into traps related to compliance, regulation, inconsistent performance and unsound business practices and they can just disappear entirely.

Some of these practices are already in place at some platforms. No platform is doing all of these things, yet. As you can see, most of these focus on the important areas of due diligence, borrower verification, compliance and disclosures.

This Lenders’ Bill of Rights are a good start to best practices. The Bitcoin ecosystem needs these platforms to be successful and provide a non-bank avenue for capital and repayment in Bitcoin so new operating companies can develop and grow.

What did I miss? What do you think the platforms need to adopt as a best practice?

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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