Beyond doubt, the year 2022 will leave a lasting memory in the minds of the crypto industry: following two years of spectacular growth, crypto ultimately entered a new winter phase – this time crashing even lower than its pre-pandemic level. Disappointing as it may be for those who believe crypto will become part of our economic structure in the future, there are still many projects and innovations that demonstrate the resilience of the community. In fact, like the early days of the internet and the subsequent bubble, the web kept on growing. Now, the same is happening in Web3.
While the industry grapples with the fallout of the current crypto winter, there are still those who were promised decentralised access to banking that never saw a virtual penny. DeFi was meant to provide access to the 2 billion unbanked but instead just allowed the rich to get richer. And while the crypto bros have moved on, the promise of the technology still lasts.
One particular project that was meant to support the heady days of crypto, providing Crypto Credit Scores to Bitcoin billionaires, has continued to innovate, but with a much larger and much more needing group of people around the world: the nearly 4 billion people caught in the Credit Paradox.
With its faith in the potential of Web3, CreDA (Credit Data Alliance) - the world's most advanced decentralised credit rating service, has launched its Credit4Good programme, designed to provide access to credit for those who have not been included and are trapped in the credit paradox. The programme is already working with partners in India and South America to assist local farmers and they have even bigger plans.
Fascinated by the change CreDA can make in the lives of those who don’t have access to credit, I approached the leaders of this ambitious project – Fakhul Miah, the CEO of CreDA, Jon Hargreaves, the ESG Lead, and Fred Dinz, the Head of Credit Risk Modelling. We spoke about how CreDA can bring a tangible improvement to people’s lives, how Credit4Good can help solve the Credit Paradox, and ultimately, looked into the technology behind the project.
1. Let’s begin with you, Fakhul. To start with, I’m well aware that CreDA is not like other projects in Web3 – both in terms of scale and scope of impact. So, what exactly is CreDA, and why do you think the crypto industry is in a desperate need of credit scores?
Having worked in traditional banking for my entire career, I felt there was more that I could be doing to address the economic gaps I experienced in my own upbringing. I am one of a family of 13, so I know what challenges life can bring. Some years ago, I got into crypto and saw the potential the industry could offer. It was hard to ignore the overcollateralization required which, compared to traditional finance, isn’t as common. So despite the technological opportunities, crypto still wasn't accessible and not aligning to its original promise. I wanted to do something about it, and instead use this technology to fulfil the original promise of crypto and help break the Credit Paradox.
2. What is the Credit Paradox?
The Credit Paradox is a widespread phenomenon that neglects the majority of the population from accessing credit because of inherent bias in the system that results in a lack of credible data on an individual and their ability to pay back loans. This lack of data history then self perpetuates the problem because no one trusts the person to fulfil their obligations. They’re seen as too risky, so they aren’t provided any credit, which keeps them out of the data loop. By default, this leads to the wealth division,an inherent lack of opportunities in certain groups and is further aggravated by institutional complexity in the banking system, which paralyses the whole structure and makes it incapable to implement change, only leading to further exclusion from the system. This is the Credit Paradox. Primarily, victims are marginalised groups such as women, ethnic minorities, refugees from war and environmental disasters. Another area we try to tackle is in food security, because local, small-sized farmers can’t get loans to grow their farms and sustain their communities, which is becoming a big problem since the war in Ukraine and Covid supply chain complications.
3. Jon, now the question for you: as the head of CreDA’s ESG efforts, how is CreDA being used to support the unbanked population and people with no access to credit?
CreDA has officially launched a programme that leverages our technology for people who are susceptible to the Credit Paradox. It’s called Credit4Good. It’s a complex problem that is really quite easy to fix, but it just needs the right partners to come together. First and foremost, there’s a need to address the issues around data. Most people have internet-enabled phones, which are often being used now for micropayments and other applications. However, this data is owned by the apps and isn’t shared with the user. CreDA leverages the blockchain, AI and custom credit risk models to help us build a unique view of the user and their behaviour. But often that’s not usually enough to satisfy lenders, so we need local partners who can not only help us orient people on how to build their credit profile, but also to provide us with off-chain (real world) data that can be modelled along with CreDA’s data to create a unique score that can then be built and improved over time. No banks. No fiat currency. No KYC. An example of this is how we are using the geo and imaging data of rural farms in India and Brazil to create customised credit scoring criteria for farmers who need access to capital to grow their farms and feed their communities..
4. And what are the other areas in which you are applying CreDA’s technology?
This is a new application of a new technology to fix an old problem. The Credit Paradox affects so many different communities and industries. Any group that is looking for low collateral capital to kickstart their small business or contribute to their community could benefit from Credit4Good. As we are only a startup, we need partners who are familiar with the problems we are trying to solve but who may not have explored the potential of decentralised financial (DeFi) applications . Weare actively looking to partner with investors, businesses, NGOs and social enterprises that support women or minority entrepreneurship, that have an environmental impact and that support communities displaced by climate change.. Social enterprises, for example, often struggle to obtain loans from banks because their business doesn’t focus on return on investment as a primary business metric. Credit4Good can help them get the financing they need, faster, easier and without the red tape. There are 4 billion reasons why people can’t get access to credit and 4 billion potentially life-changing stories for what people would do if they could. The potential for positive change is very real. All people would need is a crypto wallet and a chance.
5. Now Fred, please, tell me: what’s stopping banks and lenders from helping everyone? Surely, there’s profit to be made – so what’s the deal?
There is a huge upside for providing access to credit for everyone. The World Bank estimates that if the underbanked can be included within the formal credit sector, it can boost global GDP by $250 billion a year. But having worked in banks to develop credit risk models and even with the industry standard, FICO the matter of fact pertains: it is just too hard. In the eyes of banks, providing access to credit isn’t worth the effort because the data is lacking and their models are outdated and frankly, biassed. .
The current credit environment uses historical behaviour and personal information to assess the obligor probability of repaying a credit facility. The main focus of those models is to evaluate the willingness to pay and customer affordability. However, unbanked customers struggle to join the conventional credit market for one simple reason - they don't have any credit history. There is a clear bias in the evaluation model depending on the individual's social status, gender and geographical characteristics.
Web3 offers a new and more efficient way to assess credit risk based on an innovative source of data, which is very different from the status quo information used by traditional banking. Because of the anonymity, transparency and immutability of blockchain technology, Credit4Good allows people to enter the credit market, providing new and better opportunities that can contribute to the financial growth for the entire world GDP.
Take for example my home country of Brazil and the challenges faced by farmers there who want to contribute to the country’s food security and feed their communities but are faced with unrealistic interest rates for loans needed to expand their farms. ThroughCredit4Good, we are fusing on and off-chain data to build custom, objective, credit risk models that allow farmers access to an additional line of credit with a better and more competitive price. In short,Credit4Good allows them to bypass the traditional means of accessing capital bringing a range of possibilities for generating internal growth and revenue to their business and helping to feed more Brazillians.
6. In this case, what makes CreDA’s approach so distinct?
CreDA’s technology stack is very unique. Through decentralised Identifier (DID) technology, we allow for users to maintain their anonymity, while blockchain’s transparency and immutability allows us to collect and model data in real-time. These models are updated based on objective parameters, such as on-chain assets and repayment behaviour, which can be processed instantly. Lastly, this information is minted and stored as a Soulbound credit NFT (cNFT) that is interoperable across Web3 applications, most importantly DeFi lending protocols, who can offer low or even no-collateral loans, which is what we are used to in the real world.
CreDA and our Credit4Good programme has the potential to elevate the financial industry to another level.
The crypto industry may have entered into a new winter, but projects like CreDA that are building the infrastructure for Web3 while also executing their vision to help the underbanked through the Credit4Good programme, show that the underlying technology behind Web3 has plenty of potential for the future.
Now, with Credit4Good powered by CreDA, there is an opportunity to change how we think about crypto and Web3. Not as get rich quick ponzi schemes, but as technologies that can actually deliver on the original promise of blockchain to give credit where credit is due to billions of people shut out of banking systems and who are caught in the Credit Paradox.
