Gu Yanxi: How to use the blockchain to bring paradigm changes to the global personal credit industry

There are still a large number of individuals and institutions that are not served by financial institutions around the world. This group is often referred to as the unbanked and underbanked group. Providing financial services to this group is a common concern of governments. Different efforts have been made within the existing financial system to address the credit problems of this group, the most famous of which is Yunus Bank. But these attempts within the existing market structure and system have only yielded limited results.

This group does not have access to financial services. It cannot simply be attributed to the financial institution’s sinister poverty. As an independent entity, a financial institution must first abide by the laws of the market and operate to ensure its survival and development before it can help other groups. In the fierce market competition, if a financial institution is too focused on social welfare type business, it ignores the normal profit business. Such an institution does not have long-lasting vitality, and the social welfare business it provides cannot be sustained.

One reason for this unbanked and underbanked group in the market is the opacity of credit information for loan applicants, and the high cost of obtaining real information. This opacity has caused some low-income groups with good credit to be unable to obtain matching loans. It will also cause some lenders to have no incentive to repay. There are even some lenders who commit malicious loan fraud because they can take advantage of the opacity of market information and deceive different financial institutions at different times. This has led to technological reasons in the market for both technical reasons and existing business models.

In terms of technology, each financial institution has its own centralized system to record its customer information and loan information record information. In terms of business model, each financial institution monopolizes the information of these customers and does not share it with other financial institutions. Therefore, the information of the same loan applicant is repeatedly distributed among different financial institutions. No financial institution can truly understand the full financial situation of this customer. In some countries with more developed credit information, special credit bureaus have realized the sharing of financial credit information of some customers. This is very helpful for financial institutions to understand a user's credit information, and thus can decide whether to loan, how much and how much interest. However, in some countries where credit bureaus are not well developed, financial institutions are easily deceived by fraudsters because they do not share such information. In addition, some credit-worthy users have information only in one financial institution. When he went to another financial institution to apply for a loan, because the financial institution did not have the previous credit history of the user, it was unable to give a relatively matching loan based on its good credit history.

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The above are many individuals and institutions that have not been served by financial institutions due to the existing market structure and business management habits. The emergence of blockchains and stable currencies has created an opportunity to fundamentally change the personal credit business, bringing paradigm shifts to the business. It can take advantage of the blockchain and stable currency characteristics, as well as the business organization model supported by blockchain technology, to bring about a paradigm shift in the industry worldwide. The industry can be more transparent, the credit history of each loan applicant is truly recorded on the chain, and can be shared by all parties in the ecology, and this sharing will not be limited to one country. Due to the international nature of blockchain technology, any information recorded on it can be found by individuals and institutions in any corner of the world. Such an individual's credit can be queried by any individual or institution in the world that can provide financial services. In addition, the most important point is that the credit history of the loan applicant is owned by itself. The loan applicant can share this credit history with any individual and financial institution with whom he works. Because blockchain technology guarantees the authenticity of this credit history, any individual and financial institution can make a correct assessment of the creditworthiness of the loan applicant based on this credit history data.

Such a blockchain-based solution consists of two components, technology and business.

First, the technical program

• A public license chain that supports smart contracts is required. This chain is used to connect the parties involved in the financial credit business, and credit issuance and repayment are all required to be completed on this chain. The lending process is done entirely through smart contracts. The lending and repayment processes are guaranteed through smart contracts.
• Stabilizing coins are used as a value exchange medium in this chain. The credit smart contract completes the loan and repayment process by stabilizing the currency. If the business is cross-border, then stable currency is a basic requirement of this ecology.
• The identity of the user is done through a third party identity authentication service or by a participating lender. If the business is cross-border, it can be done in cooperation with identity-based service providers based on blockchain technology.
• A website or app based on various information on the chain. The information displayed on this website is based entirely on the information on the chain, so its authenticity is guaranteed. This website is for the inquiry of related information on the chain for various types of users.

Second, the business plan

In the business aspect of this solution, a number of financial institutions providing this business are required to operate jointly. This ecology should be open to the financial institutions and encouraged to participate. The more financial institutions involved, the more users who apply for loans, the greater the value of this ecology, and the participants in the ecology can therefore receive reasonable services and rewards. The lending information of each financial institution is controlled and shared according to the rules determined by ecology.

The development, construction and operation of the network in this ecology, ecological governance, and some universal services (such as credit evaluation and collection) in the credit business can all be operated by one company. This company should be managed by the participating financial institutions in order to best serve this ecology. A similar example in the current financial market is the Options Clearing Corporation (OCC) in the US options market. OCC is jointly owned by the first five options exchanges in the US options market. This company is a non-profit company. Fully for exchanges and clearing members and services. The annual profit on the company's books needs to be zero. All profits generated each year must be fed back to shareholders and clearing members.

In this ecology, a securities pass can be further used to contact all participants. In the ecology, financial institutions, network management companies and users jointly own this securities-type certificate. Every loan in the ecology needs to automatically pay for the service to this network. This part of the service fee can be used to periodically distribute to the holder of the certificate. The interests of the main users in the ecology are therefore tied together through the pass. As the ecology grows bigger and bigger, more and more transactions are generated, and the benefits that pass holders can get are increasing. Therefore, the common goal of this holder is to make this ecology bigger and better.

Such an ecology provides a quality foundation and solution for the personal credit business. A well-paid user, even if his income is very low, can borrow a loan based on his good credit history. Other users at different credit ratings can also get a matching loan. Deliberate defaulters have no room for survival in such an ecology. This ecology can gradually grow into a good positive circular ecology of personal credit business.

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