P2P Lending Regulation Looms as China’s Ezubao Ponzi Scheme Unravels

Peer-to-peer lending has become an emerging trend in various countries around the world. Especially in China, things seemed to be heating up, thanks to a company called Ezubao. But at the same time, rumours started surfacing this company’s intentions were less than honorable. At it turns out, Ezubao was nothing more than a Ponzi Scheme, hurting the public image of peer-to-peer lending in the country.

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The Ezubao Ponzi Scheme

When a platform specialized in peer-to-peer lending launches, the main goal for campaign creators is to secure additional funding for their project or idea. Unlike crowdfunding projects, P2P lending is a direct loan between one person and the recipient, with the promise of paying it back in due time, with additional interest.

What makes this concept so interesting is how peer-to-peer lending can be done on a one-to-one basis, rather than dealing with dozens of different individuals. At the same time, this will help create a trust relationship between the person lending the funds, and the entrepreneur or company looking for additional money.

Ezubao was the largest peer-to-peer lending platform in China, and the company saw a lot of money flowing to projects hosted on their website. But as it turns out, 95 percent of all Ezubao projects were fake, and close to 1 million investors were scammed. In total, $7.6 billion USD has been loaned to bogus projects, and investors will — most likely — never see their funds returned to them.

Anyone looking to venture into the world of peer-to-peer lending as an investor will need to be wary of unrealistic promises. Ezubao offered guaranteed high returns on investment products, some of which were so obnoxiously high, something had to go wrong sooner or later. To put this into numbers, Ezubao offered a return worth 700% of normal investment rates offered by banks. Keeping in mind how China’s economy is taking major hits right now, it would be impossible to offer these returns.

However, there were quite a few investors who took up Ezubao’s offers, and they were expecting to be paid out. As the company could not keep up with payouts, they created bogus investment products using the funds raised to pay back older investors. In the dictionary, this is called a Ponzi Scheme; not that it matter to company executives, mind you, as they kept raking in cash bonuses and other perks.

Despite Ezubao executives attempting to destroy any evidence of their Ponzi Scheme, the police managed to recover over 1,000 financial documents. It has to be said how company executives went above and beyond to hide this information, as several travel bags containing these documents had to be excavated.

Negative Effect on Bitcoin P2P Lending?

Whether or not the Ezubao Ponzi Scheme will have an effect on Bitcoin P2P lending, remains to be seen. While this market is not something Chinese investors will try their hand at in the near future, it remains an important industry for entrepreneurs and startups. Especially in the Bitcoin world, where funds are hard to come by through traditional means.

At the same time, the Ezubao story puts Bitcoin peer-to-peer lending in a different spotlight. Companies such as BTCJam have been offering P2P loans for quite some time now, and rumors have been surfacing explaining how the rates of return were rather low back in 2014. Company officials stated how scammers represent a small minority of the platform users, though.

Further regulation of the peer-to-peer lending industry can be quite beneficial to Bitcoin as well. Bringing fairer competition and more confidence to this industry will be the key to success for P2P loans. However, government officials and policymakers have to keep in mind there is no need for a crackdown on peer-to-peer lending platforms.

What are your thoughts on Ezubao and the future of peer-to-peer lending? What will the effect be on the Bitcoin side of things? Let us know in the comments below!

Source: Tech In Asia

Images courtesy of Ezubao, Shutterstock

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