An Indian entrepreneur logs into a website and borrows directly from an individual saver in the United States. The cash is cheaper than the small-business owner could get from a lender at home. The transaction happens in minutes, and it costs next to nothing to execute. It is a nearly hassle-free loan.
Some costs serve a purpose, though. And in this example, it's unclear which country's rules apply to the loan, what the lender's options will be if the borrower defaults, or even whether the business owner will be able to put the loan's proceeds to practical use.
Welcome to the borderless, untamed world of peer-to-peer Bitcoin lending. Over the last few years, the simultaneous rise of P-to-P lending and digital currencies has given birth to online platforms that combine those two hot trends.
For now, these global platforms remain quite small the largest of them, BTCJam, has facilitated just under $14 million, or about 56,000 bitcoins, in loans. But their emergence poses what is perhaps the most extreme test case of the clash between the fast-moving financial technology sector and the far more staid realm of financial regulation.
[Coming this November: Marketplace Lending + Investing. Hear how participants in this fast-growth niche are using data and technology to propel lending into the 21st century.]
The lending niche has largely flown under the radar of regulators who are just starting to wrap their minds around Bitcoin, as well as P-to-P lending, but have not tackled the implications of combining the two innovations.
Stricter rules recently arrived in New York and are likely on the horizon elsewhere. After state authorities required digital currency businesses to obtain so-called BitLicenses, at least one Bitcoin lending platform, BitLendingClub, barred participation by New York residents.
"It's very tough for a company our size to get that kind of license," said Kiril Gantchev, chief executive of BitLendingClub. "We have to unfortunately say, 'Hey, New York is not for us.'"
The platforms face other steep challenges. Not least of them: convincing loan investors that they stand a good chance of getting their money back and earning a healthy return. After all, many of the borrowers live in developing nations, far from the reach of U.S. law.
Jose Caldera, a vice president at IdentifyMind Global, which specializes in risk management services, said that the Bitcoin loan platforms will attract borrowers and lenders who are on the fringes of the financial system.
"That is positive in that it serves the underbanked and unbanked, but it will also attract users that have been rejected through other, more established channels," he said in an email.
Referring to P-to-P lending and digital currencies, he added: "You're essentially combining two industries that would already be high risk on their own."
It is a measure of the enthusiasm among venture capitalists for both cryptocurrencies and peer-to-peer technology that firms fraught with such risks have gotten off the ground.
The companies' fundamental promise is to lower the cost of borrowing in developing countries, where affordable consumer credit can be impossible to come by, while still providing strong returns to the loan investors.
"I think Bitcoin is a great transport mechanism for moving value around quickly," said John Light, the founder of a now-defunct firm called PawnCoin, which had envisioned using bitcoin as collateral for loans that would be denominated in U.S. dollars. "It settles transactions in about 10 minutes. And it's widely accepted in many parts of the world."
BTCJam was launched in 2012 by a former Citibank banker named Celso Pitta, who was then living in his home country of Brazil. Initially, Pitta planned to use PayPal's payment system to operate a peer-to-peer loan marketplace. Then he hit on the idea of using Bitcoin instead.
"Bitcoin is fast. It's cheap. And all of a sudden, instead of having a local business in Brazil, I had a global business that could operate in literally any country," he said.
In March 2013 Pitta traveled to Silicon Valley for a Bitcoin conference, where he met a venture capitalist whose firm would eventually invest in his company. Today San Francisco-based BTCJam has 17 employees and has facilitated more than 17,000 loans in 116 countries.
Gantchev has a similar underdog story to tell. His firm, BitLendingClub, has an office in the Chicago area, but runs most of its operations out of Bulgaria. The company has facilitated about $5.5 million in loans since its launch in May 2014.
"From day one, we've been able to service over 120 countries. And that's for a startup more or less based in Bulgaria," Gantchev said. "I think that is a really strong indicator of the potential of Bitcoin."
Some investors in Bitcoin loans have taken to online forums to issue cautions about the risk that borrowers will take the money and run. The platforms' operators acknowledge the risks, but also argue that loan investors can take steps to protect themselves from fraudsters. BTCJam has an overall repayment rate of 85%, according to Pitta.
"If you diversify across a large number of loans, you're almost guaranteed to be positive," Pitta said, adding that when loans do go bad, they are subject to an international arbitration process that is binding across more than 150 countries.
Another Bitcoin lending platform, Bitbond, counsels investors to diversify their portfolios by loan size, the geographic location of the borrowers and other factors. The Berlin, Germany-based firm also advises investors to assess the plausibility of short blurbs that borrowers write, describing why they need the cash.
"While the description doesn't have to be long, it should make sense to you," Bitbond instructs investors. "Note that many borrowers on Bitbond are not native English speakers. So grammar and spelling might not always be perfect."
Today, many of the borrowers on these platforms are operating within the Bitcoin economy. Some are borrowing to invest in the equipment necessary to build a bitcoin mining operation. Others are cryptocurrency traders.
The Bitcoin marketplaces want to become more viable options for the large majority of consumers and small-business owners who are not terribly tech-savvy, and have no interest in hedging the risks associated with price swings in a volatile digital currency.
In the meantime, outside observers warn that the Bitcoin marketplaces are no place for novices.
"If you're a consumer, the lack of an industry-standard way to hedge bitcoin volatility makes it hard to know if a provider is doing this responsibly or irresponsibly," said Adam Shapiro, a managing director at Promontory Financial Group.
To reach a more mainstream audience, the platforms need to make it fast and seamless to convert the proceeds of a loan into the borrower's local currency. Both BTCJam and BitLending Club are currently working on tackling those technical challenges, but acknowledge that they haven't yet solved them.
(There are also novel risks for a currency that runs on an open-source protocol, such as the possibility that the network might "fork," or split into two, if a controversial software upgrade meets widespread resistance,)
"Improving the experience just takes a little time, but we are getting there," BTCJam's Pitta said.
"I think that's the main goal to reach a greater audience, and be able to fund more loans where people need it most, which is the developing countries. In order to do that, we need to make bitcoin really easy to use, and easy to convert," he said.
At the same time, the Bitcoin platforms are bracing for much more regulatory scrutiny.
Bitbond CEO Radoslav Albrecht said his Berlin-based firm believes it must first comply with German law, and has been in contact with that country's financial regulators.
He added: "I agree with you that it remains to be seen how regulators outside of Germany might see this."
BTCJam's Pitta said: "We think that regulation is important for financial services."
"We welcome it. We know that it's inevitable. And we are working with the authorities to comply."