It is nearly impossible to predict the cause of a financial crisis – but one sure can speculate on factors that indicated things were headed for the worst.
Take credit, for example. It came as no surprise when credit default swaps and bundled loans were the cause of the financial crisis that plagued the U.S. back in 2008. Combine abuse of centralized authority with general greed associated with “big bank” profiteering, and the economy has a disaster on its hands. If handled improperly by centralized agents, credit can severely cripple the economy, again. Enter blockchain technology – a decentralized solution poised to disrupt the industry as we know it.
According to this Wall Street Journal article, we are facing new credit-related issues that could trigger a global financial crisis. Among them is the build-up of non-performing loans (NPLs) across the world including China, India and parts of Europe.
The China Banking and Insurance Regulatory Commission reported that non-performing loans rose 183 billion yuan ($26.6 billion) to hit 1.96 trillion yuan by the end of June 2018, the biggest quarterly jump in data going back more than a decade.
Meanwhile, Indian banks are saddled with an estimated $210 billion of non-performing assets (NPAs) and in Italy, over €185bn of NPLs were outstanding at the end of 2017, the most for any country in the European Union.
Bad debt can create widespread default and if left unchecked, can destabilise an economy to the point of financial collapse. But what if we can use blockchain to eliminate what’s causing bad debt at the source?
A flawed credit model
The core model of a credit agency is to share costs among clients and charge excessive interest rates and transactional costs ensuring that the “good borrowers” cover those who don’t repay their debt.
Obviously, this cost-sharing approach is unfair and unsustainable. For borrowers, it brings an additional cost. For credit agencies, their profit margins are always limited, and cost management becomes ever more difficult.
Disrupting credit via blockchain
Picture a decentralised or dis-intermediate credit world which breaks up excessive premiums resulting from intermediaries taking advantage of their positions as data gatekeepers; one where borrowers don’t have to be charged arbitrary fees for checking and receiving their credit score every time they are taking out a loan. Charging exorbitant fees to lenders who are liable to default is perhaps the most critical issue plaguing the global credit industry. But blockchain can address a host of other issues as well.
Through the usage of blockchain-based technology:
Addressing bad debt
We are living in a critical time for blockchain innovation in the credit industry and many companies are in a race to find solutions to address some of its most dire problems. In fact, in March of this year, the State Bank of India (SBI) announced that it will soon have a blockchain-based exchange for bad debts along with other banks, asset reconstruction companies and investors on the same infrastructure.
They promise that such a unified infrastructure with all related participants on board will help avoid debacles like the recent bank guarantee/LoU-related frauds. That way, everybody will know the origin of a transaction and the entity responsible for its final settlement.
A financial crisis usually has complicated origins with many contributing factors, but one thing is for certain, blockchain is actively disrupting the status quo of credit. What was once an antiquated system prompted by a centralised framework will be an open, decentralised, and autonomous credit ecosystem focused on privacy protection and the overall needs of consumers.
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