The last few years has seen the growth and hype around crowdfunding and P2P lending surpassed by only one other technological development in the finance sphere - the emergence of cryptocurrencies like Bitcoin, and the blockchain technology that underpins them. The intersection of these two trends could be an area with significant opportunities, such as cryptocurrencies bringing cost-savings to crowdfunding or the potential for crypto-equity on the blockchain to make it easier to hold small stakes in companies.
Cryptocurrencies, and in particular Bitcoin, have been receiving increasing levels of attention in recent years with enthusiasts seeing them as having the potential to overhaul how we receive, hold and transfer value. Advocates like prominent US venture capitalist Marc Andreessen point to the plethora of applications of digital currencies and how they can deliver value to users. One example is ensuring that a large chunk (up to 10%) of the estimated $400bn of remittances sent to developing countries by citizens working abroad each year is not lost to fee taking money-transfer companies. Another is allowing content producers to charge arbitrarily small amounts to consumers of individual pieces of content, like an online news article, without being worried about disproportionately high transaction costs for such small payments.
However, there are also those that feel cryptocurrencies are fundamentally flawed and will not replace current national currencies. Some economists such as Paul Krugman point to the recent fluctuations in the value of Bitcoin and question its ability to be a stable store of value given the lack of a central bank controlling supply and demand or bitcoin having any ‘real world alternative uses’ as gold does. Other concerns about the growth of usage of the currency centre around its usage in illegal activities such as the sale of drugs or whether it may facilitate tax evasion.
While some of the above points may mean cryptocurrencies will struggle to become mainstream or replace traditional currencies, their ability to transfer small amounts of value across at little cost may mean that crowd-based finance models may be one place it thrives. Traditionally, crowdfunding and P2P sites can take payments from the public, either through bank transfers or via third party payment providers. While bank transfers work well if all three parties (the person committing funds, the platform and the person receiving the money) are in the same country, if they are not, these become subject to international bank transfer fees as well as potential currency conversion charges. Payment providers such as Paypal and Amazon Flexible Payments therefore tend to provide the payment solutions for large international crowdfunding sites like Kickstarter and Indiegogo and take in the region of 3-5% of each dollar, pound or euro funded through the site.
The relatively small amounts being transferred makes payment fees disproportionately high for cross-border payments in particular. Digital currencies such as Bitcoin can serve as a much needed solution to this problem, allowing the small amounts contributed through crowdfunding sites to be transferred without the need for payment providing intermediaries like banks or others like Paypal. Another benefit of digital currencies is that some of the functions provided by the crowdfunding intermediary can also be provided at little or no cost by the technology underpinning the currency. For example, the code underpinning the blockchain could be amended to facilitate the task of holding money throughout the fixed duration of a campaign. It could also take charge of releasing it to the person raising money, or back to the funder depending on the campaign reaching a pre-determined target, without the need for platform intervention or other tools such as escrow accounts.
A number of platforms, such as Scandinavian equity crowdfunding site Fundedbyme have already begun accepting bitcoin. Early successes include Safello, a Bitcoin trading platform secured €629,000 including investments via Bitcoin on FundedByMe in May 2015. Others sites accepting Bitcoin include leading Australian crowdfunding platform Pozible and a number of P2P Bitcoin lending sites like BTCjam, BitLendingClub and BitBond.
While we are still quite a long way from cryptocurrency usage becoming ubiquitous, online funding portals have strong incentives to be the early adopters of the technology.
While many are still sceptical about the potential for cryptocurrencies to become mainstream, there seems to be a broader consensus about the transformative potential of the technology underpinning cryptocurrencies, the blockchain. In the context of Bitcoin, this ‘distributed ledger’ system, keeps digital records of currency ownership and transactions completed, in a large number of distributed repositories. The principle being that, the open and distributed nature of the ‘record keeping’ ensures that evidence of ownership is reliable and the reporting of transactions is verifiable and secure.
While the blockchain has come to notoriety as the foundation of cryptocurrency management, its potential is far greater as it can be used as a method of storing information and transfer of all types of assets. One potentially interesting application is what is called crypto-equity or crypto-securities, the idea that the recording of ownership and transfer of assets like shares in a company could be handled by blockchain technology. This application has the potential to revolutionise models like equity crowdfunding which tend to have relatively large amounts of administration effort relative to the size of individual investments being made. These crypto-shares could be issued by a company, would have the same rights as regular shares and would appreciate and depreciate in the same way depending on the supply and market demand for the shares.
An early adopter of this is US online retailer Overstock which is planning to issue €25m in securities using the blockchain. CEO Patrick Byrne believes that using this technology and the clarity it has in relation to real-time ownership of shares can overcome some of the less scrupulous activities involved with trading securities currently.
Others innovating in this space with more of a startup focus are Swarm, Koinify and Lighthouse, three decentralised crowdfunding platforms that allow companies to create their own coins whose ownership and trading are tracked using the blockchain. In these models a company incorporates by creating a virtual currency or coin and then issues these coins in the same way that a company might currently issue shares. The coins are easily tradable for other virtual currencies and appreciate or depreciate in value depending on the company's fortunes.
A principal benefit of this type of share issue is that the associated administrative costs (like that of issuing share certificates) are considerably less, allowing for investors to make smaller investments. So while currently, some equity crowdfunding sites have minimum investment amounts of £10, this could facilitate even smaller investments. However issuing securities in this way faces regulatory challenges such as the current requirement to keep track of shareholders in a shareholder registry and thus most sites offering these functions are currently unregulated.
Cryptocurrencies and the technology underpinning them face many challenges and a long road before they become part of people’s everyday lives, but as they grow in prevalence, online, crowd-based funding models seem a natural fit.
Its not hard to see why large international crowdfunding sites would choose to offer Bitcoin or some other cryptocurrency as their payment medium of choice, cutting out payment fees and facilitating funding in a common currency for backers in multiple countries.
Equally, as crowdfunding and peer-to-peer lending have allowed retail investors to access asset classes and investment opportunities previously unavailable for them, platforms will be incentivised to effectively facilitate investors with less capital overall to invest or to achieve higher levels of diversification. A system where small amounts of equity of can be attained without significant amounts of red tape and allowing for efficient record keeping of high volumes of shareholders and trades would also provide significant value to investors and companies alike. Securities relying on the blockchain may therefore move from the margins to becoming much more mainstream.