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Group Lending with Bitcoins

Date: 2014-01-25
Tags: loans lending bitcoin group-lending

Some of the earliest forms of banking had two functions:

  • Storing and accumulating assets
  • Allowing for the use of assets away from home
  • Loaning assets

While the first and second function are made obsolete when using Bitcoin, a decentralized currency back by cryptography, the last is still not. People still need loans, specifically short-term loans for reasons such as emergency home repairs, large home improvement projects, purchasing a car, among other reasons, regardless of the currency they use.

Banks are able to provide loans through a system called Fractional Reserve Banking where the bank takes depositors assets, loaning them to borrowers with interest, then taking part of that interest itself, and splitting the rest of the interest among the original depositors. The largest problem with this system is that the assets of all deposits are not present in the bank, and in the case of a bank run can cause problems. Often central banks and state governments will provide insurance and become lenders-of-last-resort to avert situations where a depositors deposits are unable to access their deposits.

In a system such as Bitcoin, where there is no central bank or government, a fractional reserve system can’t have the traditional safety nets. However, because a “Bitcoin Bank” isn’t needed to store depositor’s assets, a depositor need not keep all of their assets in the bank. As such, the depositor could provide a tiny amount of capital for the “Bitcoin Bank” to loan and receive back principle and interest on those “deposits.”

I would like call this group lending organization a “Lending Union.” Instead of depositors who store the majority of their assets, a Lending Union’s depositors only deposit a small portion of their assets.

The Lending Union’s job is then to make responsible and reasonable loans to those in need in order to make the members interest without losing their principle. This may mean, however, that a depositors assets may not be available at any given time in full without notice to the Union to not relend their initial investment as it is paid back.