When blockchain meets online lending: The business using one to improve the other

 
Harriet Green
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Blockchain can help solve liquidity issues in marketplace lending (Source: Getty)

Leveraging technology to create a new asset class has been done a fair amount in the financial world – most notably in recent years by the P2P industry, which makes credit more accessible, faster and cheaper for individuals and business while delivering a return to investors, via increasingly accurate risk profiling.

Sydney-based platform Othera goes a step further: the blockchain lending platform allows lenders and investors to access digital loans. It then chops up those loans – which are backed by businesses’ cashflows – in a process called tokenisation. These tokens can then be sold on an exchange, turning a traditionally fairly illiquid asset into a highly liquid digital asset.

Read more: The organisations of tomorrow – and the technologies already building them

I spoke to founder and chief executive John Pellew, a former investment banker, to find out more about his firm.

Why did you launch Othera?

The overarching reason for launching Othera and building a blockchain lending platform is to unlock the alternative investment asset class and help it become mainstream. I see the potential for this new class of assets (Othera is building just one of them) to become like the ETF market. But we need to solve the problems of lack of transparency of risk and deal structure, and the problem of lack of liquidity.

You use blockchain to provide ongoing credit analysis of borrowing firms. How does that work and why is that so useful?

The blockchain provides what I call “total asset provenance” which means that every single interaction between the borrower and the lender is logged on it.

This fine-grain loan-level data and loan performance data can be shared by the lender on a permissioned basis to whoever requires it. That could be the investor, the regulator, the auditor, or an alternative investment asset analyst company like AltFi Data, who can run comparative loan and loan book performance analytics on lenders and loans and hence the assets available for investment.

Our aim at Othera is to build a system that is so good and with such low friction that the users don’t even need to know that it’s powered by blockchain technology. As a company, we are already way beyond the hype of blockchain and are just getting down to the business of building and deploying enterprise solutions for lenders.

Read more: A consumer's guide to blockchain

How does tokenisation work?

When we talk about tokenisation in the context of our platform, I am talking about the process of linking the rights to loan repayment cashflows (the principal and interest of the loan) to a digital cryptographic token similar to a bitcoin. So if you hold (own) the token, you will receive the pro rata portion of the loan repayment that your token represents. Tokens represent a digital form of fixed-income alternative investment. Tokens can be bought and sold just like an equity or bond or cryptocurrency.

So is Othera creating an entirely new asset class?

We do have our own proprietary token, and we have a global patent pending on that. The structure of the token uses financial engineering to deliver a range of specific financial qualities that are not currently available in traditional financial products. As such, we are currently going through the process of having our proprietary token assessed and then regulated as a new class of financial product by the Australian Regulator, ASIC.

Tell us about the importance of the secondary market.

Creating a vibrant secondary market for alternative investment assets is key to the growth of an industry or product sector for several reasons:

First, at a basic level, investors will only ever commit a relatively small portion of their investable funds into an asset class or a market with no liquidity. So to expand the pool of investable funds, you must provide some level of liquidity.

Second, secondary markets are also a very good barometer of the performance of an asset class or specific investment, as the market quickly builds the strength or weakness of an investment into the current market price of that asset. Secondary markets, in my opinion, also serve the valuable function of keeping lenders honest – if they practise poor credit underwriting and poor credit control, the market will quickly penalise and force them to up their game to meet the expectations of the market or face being priced out of business.

And third: liquidity. Liquidity has a strong positive correlation to the health and to some extent safety of a market (if you can ever have a safe market). Not arguing in favour of liquidity is like arguing that the brakes on a car are not worth having because they are not going to save you from a lorry running a red light and crushing your car. I’d rather have the brakes – because most of the time they allow me to get from A to B safely.

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