Divine Research, a financial technology firm based in San Francisco, has reportedly facilitated approximately 30,000 unsecured, short-term cryptocurrency loans since last December. The company utilizes World ID, a biometric identity verification system powered by OpenAI’s CEO Sam Altman, to authenticate its borrowers through iris scans.
Divine focuses on providing loan amounts under $1,000, denominated in the USDC (USDC) stablecoin. Their target demographic mainly consists of international borrowers who are traditionally underserved by conventional financial institutions. The integration of World ID serves as a mechanism to deter the creation of duplicate accounts following a default on a loan.
According to Divine’s founder, Diego Estevez, as quoted in the Financial Times, the company extends credit to a wide range of individuals, from educators to street vendors: “We’re extending loans to everyday people, like schoolteachers, fruit sellers… Basically, if you have an internet connection, you can potentially access our funding.” He further characterized their operations as “microfinance on steroids.”
Interest rates on these loans typically range from 20% to 30%. Divine has reported a first-loan default rate around 40%. Estevez explained that “Elevated interest rates are designed to offset these losses,” and that World tokens distributed to borrowers can be “partially” recovered in the event of a default.
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Retail Investors Can Earn Returns Funding Risky Crypto Loans
Estevez stated that the individuals providing the capital for Divine’s loans are ordinary investors looking to generate significant returns. “Anyone can supply liquidity. We’ve structured the system to ensure that, factoring in default rates and offered interest, liquidity providers consistently generate profit.”
Divine is one of many high-risk crypto lenders benefiting from the current upswing in the cryptocurrency market and a favorable political climate, notably including support from former U.S. President Donald Trump.
Another startup, 3Jane, recently secured $5.2 million in funding from Paradigm. It provides unsecured lines of credit on the Ethereum network. In contrast to Divine, 3Jane necessitates “verifiable proofs” of assets or income, but still does not require collateral.
3Jane intends to implement AI-driven agents to automate lending protocols, which it believes will lead to reduced rates while enforcing loan repayment. Loans in default on their platform are sold to third-party U.S. debt collection agencies.
Other industry players, such as Wildcat, specialize in serving market makers and trading firms, providing undercollateralized loans with customizable terms. According to Evgeny Gaevoy, advisor to Wildcat, “In the event that a borrower defaults, the lenders communicate directly with each other to coordinate recovery efforts.”
Related: Fintech companies expected to transition to DeFi lending within 3 years
Crypto Lending Is Increasingly Popular
While lending is currently a relatively small segment of the broader crypto market, it is attracting increasing attention as established institutions re-enter the cryptocurrency space. Recent reports indicate that JPMorgan Chase is investigating crypto-backed lending, with plans to offer loans directly secured by crypto assets such as Bitcoin (BTC) and Ether (ETH).
However, the memory of the 2022 crypto market downturn remains a stark reminder of the risks involved. The collapses of major crypto lenders like Celsius and Genesis continue to resonate. Celsius’s former CEO, Alex Mashinsky, received a 12-year prison sentence for fraud, and Genesis reached a $2 billion settlement in a fraud lawsuit.
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