Advocates say that Bitcoin could democratize finance. Case in point, the founder of peer-to-peer lending service ProudSource Joe McKinney is building a company that aims to connect underbanked populations to capital so that they can build businesses or fund an education. The attitude can be summed up as so: Why should only the wealthy fulfill their business dreams? McKinney said over Skype:
“If you add microfinancing, you are reaching anyone with a [friggin’] cell phone who wants a [friggin’] loan.”
McKinney explained how bitcoin — or other cryptocurrencies — along with microfinancing, and mobile technology could form a new platform that would make it easier to dole out loans and charity.
Microfinancing
Today more than 10,000 microfinancing institutions hand out loans to the disadvantaged. Lenders can browse websites like Kiva and choose who to fund a woman looking to launch a business or a farmer facing a rough patch.
Bitcoin advocates that the cryptocurrency is a new way to approach the classic idea. So while services like Kiva act as an intermediary with agents on the ground who manage loans, bitcoin allows for peer-to-peer lending. In doing so, Bitcoin slashes the typical transactions costs. Lenders and borrowers can connect peer-to-peer, like over the ProudSource platform. And it can all be done by phone.
“In the future, loans and repayments will be made instantly and on a peer-to-peer basis with the terms broadcast on a blockchain,” Bitcoin Microfinance founder Ben Jones told Cointelegraph, referencing the “blockchain,” which shows every bitcoin transaction ever made. He added:
“Middle men will be made redundant and borrowers’ credit history will be publicly available.”
And some companies are already taking advantage of that. BTCJam and BitLendingClub are paving the way for peer-to-peer microlending in bitcoin.
Case study: ProudSource
ProudSource (website not yet available) starts with a straightforward application process. Any low-income entrepreneur can apply on the online application and then the borrower must be vetted and endorsed by a trustee.
The name ProudSource is pinched from the French philosopher Pierre Proudhon, who pioneered the idea of a mutualist bank, hypothetical banks that lend to the poor at a low interest rate. Boiled down, the idea behind ProudSource is to offer a private-market safety net.
Once up and running, ProudSource will offer its own brand of microfinancing—“not traditional” as McKinney called it. The inner workings are a bit complicated. The investment structure is a loan and venture capital hybrid, called Progressive Return on Capital Investment (PROCI), which is friendly to borrowers because there are no interest rates and borrowers only pay back the loan if they are profitable. Venture capitalists who invest in the company effectively buy a share of the projects backed by the loans.
Hold on a second
Jones doesn't think that bitcoin microfinance will take off right away. He and Bitcoin Microfinance are researching Beam Remit, a startup that facilitates cheap and quick remittances in Ghana. Even if there is tremendous potential, we have a ways to go before peer-to-peer loans are an everyday tool—especially in the developing countries where the infrastructure is lacking. His bet is that remittances will come first.
Companies like BitPesa are building the tools for remittances in Africa. These will make these next-generation tools like microfinance possible down the line, however, according to Jones:
“[…] we will almost certainly see bitcoin remittance become prolific before bitcoin microfinance.”