Saturday, October 4, 2014

The Promissory Note in an Electronic Age

Is there demand and supply for an instant loan system based on unregistered promissory notes? Does the Uber model work with loans? Consider a broker that sets up a clearinghouse that allows borrowers and lenders to get together and complete transactions. A reasonable design certainly is possible, so I thought I might make a back of the napkin sketch.

Lenders in such a system must be gamblers; they must be willing to risk complete loss of the bet. However, if the value of the loan is small, and the potential payoff large, then the concept might sell.

Lenders push any amount they want to risk to the clearinghouse and specify the terms. The clearinghouse aggregates the various loans and notifies the loaners when a borrower accepted their terms. Lenders may specify the total aggregate value of their loan coupled with others that the loan cannot exceed. Lenders may request a payoff instantly and the clearinghouse can try to replace the loan amount with another lender and in lieu of that call the loan and immediately pay off all the lenders if the call succeeds. If the call does not succeed then debt collectors or court are the only option and the clearing house not the lenders may take those options.

The borrowers may request specific terms such as timing of payments and no call options during an initial period. As always the greater the risk, the greater the reward, and lenders plunking down hundred dollar chips on the outcome of the roll of dice might not care if the potential reward is great enough. The real draw for borrowers is there is no credit check, although borrowers may have a past unpaid debt with the clearinghouse, which would disqualify them for any future loan. Competing clearinghouses may wish to share their list of deadbeats.

The clearinghouses profit from the float before the loan and collecting loans that failed. For example suppose a borrower could not pay off a called loan. The clearinghouse sells the debt to a debt collector and keeps the payment; the actual lenders get nothing. Clearinghouses may operate differently, some may want to register the promissory notes (especially large value ones) or have them notarized (if such an action is possible electronically otherwise clearinghouses need to invent the electronic equivalent).

That is the rough sketch, the only question remaining does the activity violate gambling laws?

Next Blog: The Promissory note as an electronic bearer bond

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