What Will Blockchain Do To The Credit Market?

Compiled By: Anil Sinha
About Anil: He is the Head of Engineering at Fibe, with over 15 years of experience, Anil is passionate about technology and has strong Leadership skills driven by core human values. He has worked on various techno-functional leadership roles with hands-on code and delivered complex products in the space of distributed data processing, especially related to trade processing and risk analytics.

Blockchain is the tech. Bitcoin is merely the first mainstream manifestation of its potential
-Marc Kenigsberg, Founder Bitcoin Chaser 
Referred to as the next big thing after the internet, blockchain technology has amassed an ardent following across the globe, and Marc Kenigsberg rightfully substantiates the immense potential of this phenomenal technology. The rather attractive adoption curve of cryptocurrencies, especially by Bitcoin, the bellwether of the crypto industry, is a testimony to the revolutionary capabilities of this new generation miracle. 

The blockchain is often referred to as a ‘disruptive’ technology. The experiments on the integration of the blockchain in different industries, such as healthcare, insurance, telecom, or real estate have exhibited its potential in breaking traditional methods and establishing a new reformed way of operating. The results, early on at least, have been promising. They indicate the inevitable creation of a more transparent and decentralized model across industries. Of course, this is completely distinct from the ongoing private and centralized systems in place. 

One of the key industries where the blockchain-aware, and the enthusiasts, are expecting a paradigm-shifting change is the credit industry. Over the years, the credit market has undergone evolutionary (and revolutionary) changes with new innovations, and regulations in response to those innovations. In my view, the shift of the credit market from moneylenders to banks, which in turn work under the supervision of governments and global organizations has sculpted the modern economy. The statement that credit is a key component in the smooth functioning of the economy is wholly true since any economic turmoil is always felt first in the credit industry. 

Before we discuss the extent of impact blockchains will have on the credit market, we need to understand the current scenario in the credit industry. The credit market has undergone a significant transition from its early stages. The evolution of credit gave birth to the bond market, the credit-card market, and commodity loan markets such as a car or home loans. Their presence is critical since these spinoff financial industries keep modern economies afloat.

The evolution of the credit market has propelled the expansion of other industries as well. The intertwined nature of industries amongst themselves is therefore obvious. If integrating the blockchain with other industries delivers positive results, we can safely expect that the effect on the credit market will be equally positive. 

Coming to the blockchain-credit market association, I can’t imagine the kind of chaos that would ensue if the credit market based on any virtual internet-based system malfunctions and goes offline. Or a scenario where a malicious virus incision in system tampers records. The successful journey of cryptocurrencies so far indicates zero incident of downtime. This is by design since the blockchain is decentralized. Plus, the immutable nature of the distributed ledger system safeguards everyone’s data. Blockchain technology offers a reliable system for the credit market to operate. This is crucial, since a downtime, or any major fraud, can initiate a global market crash. In light of these features of blockchain, here are a few trends we might witness with a merger of blockchain technology with credit market:

• The incorporation of blockchain technology in the credit market could catalyze growth in the adoption of cryptocurrencies. Since paper money can’t be loaned in a blockchain network, virtual money will triumph in a post-blockchain-based credit industry.
• Perhaps an outcome I’d be most excited about – the blockchain, by nature of being decentralized and immutable, could help us with insights into borrowers, their credit-worthiness, and much more. If borrower data were to be stored on blockchains, transparency would be consistent, and instant, for all lenders. As a result, delinquencies may fall, and interest rates may stabilize to more attractive levels as systems become efficient. 
• The far reach and spread of blockchain users across the world may lead to mass participation in an international credit market. Borrowers would be relieved of the high-interest rates that may have persisted locally, since availing a loan internationally would now be possible.
• Approval of credit requires collateral to proceed.  Once the credit is allowed through blockchain, the required collateral can be made available to the creditor on the distributed ledger through tokens. This system will give rise to the tokenization of real-world assets. 
• In the post-blockchain-merged credit market, we’d be likely to witness a rise in the private credit sector. Users with surplus cryptocurrencies would be able to credit them to other users, guided by smart contracts – automated agreements that do not require trust between either party. We may witness a shift of the credit market from a regulated industry to an increasingly privatized sector.
• With a surge in a privatized credit market, fluctuations in the interest rates charged may be a common scenario. The decentralized nature of blockchain eliminates the presence of regulated bodies, which could result in a surge of rates of interest in domestic markets due to the lack of governmental regulations. Of course, governments may be proactive and act.
• One of the key lessons from the 2008 housing bubble was the need for a transparent system. Operating the credit market via blockchains will lead to the availability of data on all the history and ongoing transactions, on a level never seen before. This could be a turning point for the banking sector which has conventionally worked behind closed curtains. 

It is, of course, too early to confidently estimate the extent of influence this technology will have on the credit market. We must not forget that blockchain tech is still maturing. The manner in which it will unravel itself can border on speculatory at times. But since the credit markets are often the soul of economies, a wrong step could host major discomfort for the global economic ecosystem. I do strongly believe though – what is the use of tech advancements if they don’t liberate us from existing traditional systems and offer us a higher quality of life? A thoughtful and tested transition of the credit market to the blockchain can be a crucial evolutionary step that can change the face of the modern credit industry.