Mexican FinTech Uses DeFi to Provide Collateral-Free Loans to Small Businesses

A Mexican lender is taking DeFi borrowing beyond crypto and into the broader financial market, extending $40 million in credit lines to small business customers.

Decentralized finance, or DeFi, has been touted as a threat to traditional financial institutions that can be disintermediated by peer-to-peer lending platforms and automated exchanges with no controlling central authority.

However, in practice DeFi lending has largely been a circular market, with borrowers using funds to invest in other DeFi platforms in order to fund crypto derivatives bets or yield farm the very high interest rates and DeFi lending/borrowing project tokens offered.

See: PYMNTS DeFi Series: What is Yield Farming and Liquidity Mining?

On Thursday, delt.ai, a Mexican firm that extends corporate credit card-based lines of credit to small businesses, revealed that it was using a DeFi lending protocol to assess the creditworthiness of would-be borrowers and provide credit lines to clients.

The firm has already extended $40 million to companies like Terapify, which says it offers app-based emotional support and therapy by certified mental health professionals.

“delt.ai truly makes sending bulk bank transfers easy and fast. Before, we would lose more than four hours each Monday sending countless bank-to-bank transfers,” said Terapify Co-founder and CEO Juan Daniel Vélez in a testimonial on the lender’s website. “Now, we just load an Excel doc and they are processed in a couple of minutes.”

Institutional DeFi

To fund the venture, delt.ai is working with the TrueFi lending marketplace, created by stablecoin issuer TrustToken (TrueUSD).

TrueFi is something rare in the DeFi world: an uncollateralized lending protocol.

Most DeFi lending requires cryptocurrency collateral of substantially higher value than the loan: Put up $150 worth of ether (ETH) and receive $100 worth of stablecoins is a pretty common example. If the value of ether drops too far, the collateral will be liquidated — at the bottom of the market — to repay the lenders.

Backed by venture capital giant Andreessen Horowitz’s crypto-focused a16z arm, TrustToken’s TrueFi lending market is doing things a lot more traditionally — albeit with one big asterisk.

TrueFi is not aimed at small retail borrowers, however. It is described as an “app store for lending” that allows asset managers to launch new lending platforms for corporate borrowers.

Its clients are “largely private, pseudo-anonymous individuals and family offices in DeFi, participating at a range of investment sizes,” TrustToken CEO Raphael Cosman told Cointelegraph Thursday (Feb. 3). Its borrowers tend to be crypto hedge funds, VC-funded start-ups, and soon, Cosman said, traditional financial institutions.

With crypto lending protocols offering interest rates an order of magnitude better than traditional bank products like savings accounts, the “best yields are no longer in traditional markets, like equities or bonds, but in DeFi,” Cosman said.

While investors need to be comfortable that they understand the market and its risks, “capital will always seek the best risk-adjusted yields,” he said. “That promise of lucrative returns is the biggest force pulling traditional finance on-chain, and we expect it to continue.”

That also applies to regulators, Cosman noted, referring to Securities and Exchnage Commission Chairman Gary Gensler’s characterization of crypto as the “Wild West” of finance.

Also see: SEC’s Campaign Against Crypto Lending Grows Beyond Coinbase

Collateral Free

Working through TrueFi, delt.ai is able to offer credit lines based on revenue and risk assessment, with features bulk SPEI bank transfers — up to 36,000 per hour — 45-day billing cycles, and a Mastercard-branded corporate credit card.

The way TrueFi makes its credit decisions is not via a ratings agency but by using another DeFi product: Prediction markets. When a borrower requests a loan, it is funneled through a decision market in which holders of TrueFi’s TRU token assess the request and vote yes or no. While the lender or lending pool doesn’t have to follow that recommendation, it is generally the decision-making process. When the loan is repaid, yes voters get a bonus in TRU tokens —as do the lenders.

“I used a ‘traditional’ bank for three years and time and time again, they told me I did not qualify for a corporate card. delt.ai did in two weeks what Santander could not do in three years,” said Ana Ramos, CEO of Gigstack, a Mexican provider of financial management software for small businesses and freelancers, on delt.ai’s website. “Thanks to delt.ai, I no longer use my personal credit card for company expenses.”