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Regulation and P2P

//Regulation and P2P

Dear Inlockers!

As you probably all know our primary aim have always been to operate our platform with a P2P model. In March it was made clear to us through several extensive legal consultation sessions that it is probably best if we start the platform partnering up with regulated lenders.

Why is P2P considered a threat according to regulators?

Well, the majority of rules are based around the conception of Jim giving a loan to Jane without any contract whatsoever, and expecting capital repayment – let’s say in 1 year time plus some interest. In this scenario, if there were no legal framework one could argue that if Jim decides that he needs his money back only 6 months in, there is nothing that protects Jane – on the other hand, if Jane decides to ride off with the money Jim can easily find himself in a vulnerable position.

To offset these problems regulators in most regions only allow institutional lenders to give out loans on a commercial scale by having to apply to a special license allowing them to exclusively provide lending services. This might seem that these rules artificially create an oligopoly situation for market players (aka banks).

Originally, the reason for these strict rules was to protect consumers and providers of loans – while it is safe to assume that disrupting the balance of market players was never the intention of regulators, the outcome is what it is.

Now the thing is, if the loan is secured by an asset, the risks and motivation of the participants change entirely. Collateralized loans are an entirely different matter, but from a regulatory standpoint (more or less) the same general rules apply to them as to traditional loans. If we add the use of cryptocurrency as collateral to the equation it gets even more complicated to define such ruleset.

Lombard credit is the granting of credit to banks against pledged items, mostly in the form of securities or life insurance policies. The pledged items must be readily marketable. In most jurisdictions, secured loans regulations define what features an acceptable asset has (what can be used as collateral for a loan) usually it has to be either a physical object or a bond.

In essence what makes cryptocurrency collateral based loans to be allowed and operated using a P2P model extremely hard is:

  • P2P lending is pretty much banned because loans are unsecured
  • While cryptocurrencies have all the ideal features of being the best collateral ever been, it is not included in the list of acceptable collaterals yet

Just as we promised, we did not give up on the P2P model and never will – we have already had several sessions with the Financial Supervisory Authority and step by step we are getting closer to a mutual understanding of the matter. They have expressed their will to be open to make significant adjustments – a new official statement allowing cryptocurrencies to be used as collateral is probably not far away.

By |2018-11-27T14:48:37+00:00November 27th, 2018|Inlock blogposts|