The Credible Friends smartphone app is designed to replace the credit card industry with a trust based peer to peer lending service, powered by bitcoin. “In under 2 minutes you can be extending lines of credit to dozens of friends,” explained the Founder and CEO of Credible Friends, Zach Doty, in an interview with BNC.
“The mission at Credible Friends is to get digital currency into everyone’s pocket by making it insanely easy to extend credit to the people you know and trust already.”
- Zach Doty, CEO Credible Friends
Available now for Android phones through Google Play, the app will soon be available soon in the Apple store. Installing it is much like any other wallet app, and after requiring that you verify both an email address and a phone number, the app creates a wallet and asks users to write down a 25-word recovery seed phrase.
Once installed, lenders first connect social media accounts, or invite friends by email, to build a contact list of trusted people. Using a slider bar tells the app how much each of the friends is allowed to borrow. The lender then needs to make sure the apps multisignature bitcoin wallet has enough bitcoin to cover the loans.
Borrowers can access any lines of credit and use the app as a bitcoin wallet, virtual bitcoin credit card, or with an upcoming physical Visa card. This would work much like a Coinbase Shift or Bitpay debit card, which work anywhere a Visa card is accepted.
“We'd like to make repayment easier by allowing users to buy bitcoin for the repayment with their debit card,” Doty added. A web wallet is also in the works.
The interest is fixed at 25% APR. Borrowers can pay back the loan as they would with any credit card, returning a monthly minimum or the balance in one go. “When a repayment is made,” Doty said, “it is applied to outstanding interest and fees, and then to principle.”
“If you spend/borrow $100 through the app and bitcoin's price doubles over the next 6 months you still only end up paying back $100 + interest.”
The company generates revenue by taking 40 percent of the interest and fees. This leaves lenders with 15% APR. Using a cryptocurrency allowed the developers to include multiple outputs from the repayment transaction. The system automatically handles the commission.
The business model recently attracted over US$100k in seed funding from the equity crowdfunding service Bnktothefuture. The lending was fittingly spread out between 87 backers.
However, while bitcoin is cheap to transfer, censorship resistant, and gives users control over their funds, the app accounts are all in US Dollars, using BraveNewCoin’s Price Index for exchange rates. “Its much easier and better than lending your friend a bitcoin on a handshake,” Doty states.
This opens up an interesting situation. “A borrower could spend to their own wallet, thereby borrowing to speculate on bitcoin's upside potential,” Doty explained. “We will likely see this happen, as the premiums on future contracts can often be quite high.”
The platform could also be used as a hedge against bitcoin price swings. The platform locks in a 15% return, depending on defaults. A loan of $590, or 1 bitcoin today, will be worth $678.50 in a year, regardless of the price of bitcoin at that time. While this may work for or against the lender, it removes volatility.
“Simply put, there just isn’t any peer-to-peer service that’s easy to use for everyday spending.”
Although extending peer-to-peer finance in the form of credit lines is a new take, lending in this manner is by no means a new idea. Peer-to-peer lending platforms, including Funding Circle and Zopa, emerged after the financial crisis, catering to individuals and small businesses seeking for unsecured loans. Bitcoin platforms, such as BTCJam and Loanbase, followed shortly after.
A European Credit Research Institute paper, states that P2P lending has developed rapidly in both the US and the UK, but it still represents a small fraction, “less than 1%,” of the stock of bank lending.
“We argue that P2P lending is fundamentally complementary to, and not competitive with, conventional banking, " states the European Credit Research Institute. "We therefore expect banks to adapt to the emergence of P2P lending, either by cooperating closely with third-party P2P lending platforms or offering their own proprietary platforms.”
Third party integration hasn’t slipped CredibleFriends by. The company asks for a state form of identification to make sure that the person taking out a loan is who they say they are, but hasn’t ruled out working with bitcoin powered identity providers like Blockstack.
With identities and a lending history in hand, the company can also work closely with credit agencies. “We're also partnering with collection agencies and adding the option for lenders to submit past-due accounts to collections,” the CEO revealed.