Crypto Literacy in Peer-to-Peer Lending

Abstract

The 2008 and 2020 crises reinvigorated discussions on the democratization of finance. Peer-to-peer (P2P) lending is a valuable option worldwide, but credit risk is high. To encourage investors, P2P platforms use blockchain and the option of crypto as collateral. This study examines lender views on crypto and options to effectively support financial literacy and inclusion. It considers 663 pro-social lending decisions by finance students on a mock P2P site where testimonials conditioned participants towards pro-social decision making. After making three lending decisions, participants were asked about changes in the case of different collaterals. Overall, pro-social P2P lenders find crypto riskier than traditional collateral. More specifically, loan applications can be funded more quickly with a pledge of 20% in traditional collateral but not in crypto assets or crypto currency. Furthermore, loan popularity among other lenders also persuades investors, and lender projections of financial literacy influence decision confidence, unlike traditional collateral. Thus, crypto collateral options in P2P platforms do not seem to support financial inclusion. However, upcoming more stable digital currencies backed by central banks are arguably more likely to be considered reliable collateral. This would effectively democratize P2P lending provided there is behavioral financial literacy as well.

Keywords: P2P lending, crypto collateral, blockchain, financial literacy, financial inclusion

JEL Classification: G01,G20,G41