Crowdfunding Current Affairs

RBI to regulate peer-to-peer lending firms as NBFCs: Government

The Union Government has issued gazette notification, notifying that Peer-to-peer lending (P2P) platforms will be treated as non-banking financial companies (NBFCs) and thus regulated by Reserve Bank of India (RBI).

The notification will help P2P lenders to gain official recognition and opens new avenues for fund-raising and business expansion. It also ends the regulatory vacuum in which P2P lending firms were operating.

Background

The RBI had floated a consultation paper in April 2016 on developing regulatory norms for P2P lending. It had proposed 6 key areas to frame regulatory framework encompassing permitted activity, regulations on capital, governance, business continuity plan and customer interface and regulatory reporting of P2P lending.

Peer-To-Peer Lending (P2P)

P2P lending is a form of crowd-funding used to raise loans which are paid back with interest. It enables individuals to borrow and lend money – without use of an official financial institution as an intermediary. It can use an online platform that matches lenders with borrowers in order to provide unsecured loans. P2P lending gives access to credit to borrowers who are unable to get it through traditional financial institution. It boosts returns for individuals who supply capital and reduces interest rates for those who use it.

Need

P2P lending is one of the crowd-funding business model that has gathered momentum globally and is taking root in India. It promotes alternative forms of finance, where formal finance is unable to reach. It has potential to soften lending rates as result of lower operational costs and enhanced competition with traditional lending channels. If properly regulated, P2P lending platforms can do this more effectively. Though it is in nascent stage but it is not significant in value yet, but it promises potential benefits to various stakeholders (borrowers, lenders, agencies etc).

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China bans Initial Coin Offering

The People’s Bank of China (PBC), central bank of China has banned individuals and organisations from raising funds through initial coin offerings (ICO) saying that practice constituted illegal fund-raising.

The PBC notified that digital token financing and trading platforms are prohibited from doing conversions of coins with fiat currencies. Digital tokens cannot be used as currency on t market and banks are forbidden from offering services to ICOs.

Initial Coin Offering

ICO is an unregulated means of crowd funding for project via use of cryptocurrency such as Bitcoin,DASH, Ethereum, Monero, Litecoin, Z-cash etc. The right of ownership or royalties of project is offered to investors in form of digital coins in exchange for legal tender or other cryptocurrencies. It means that ICO allows entrepreneurs create their own digital currencies and selling “coins” on the web under ICO route, allowing them to raise millions of dollars in a matter of minutes. The value of coin depends upon the success of business. Presently, there is no regulator for this kind of crowd sourcing.

Crypto Currencies or Virtual Currencies are type of unregulated digital money that is neither issued by central bank/public authority, nor is necessarily attached to a fiat currency, but is used and accepted among the members of a specific virtual community. They are capable of being transferred, stored or traded electronically.

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