Blockchain, bank credit and SME financing

Blockchain is an emerging decentralized architecture and distributed computing paradigm and has recently attracted intensive attention from all sectors of society. This paper sets up a theoretical model to analyze a new credit pattern that allows small and medium-sized enterprises (SMEs) assessing bank loans through the blochchain technology. Theoretical analysis demonstrates that the blockchain technology enables the decentralized consensus recording of success of debt repayment or debt default rendered by verifying and validating certain lending and borrowing activities in distributed ledgers. In the newly proposed blockchain embedded credit system, SMEs with low-risk and high-quality could display their credibility and risk class through information distribution. They are more likely to access bank loans even if they are not able to provide collateral. Results derived from the theoretical model present two main findings. First, the alleviation of information asymmetry and credit rationing problems can be achieved through decentralized consensus and information distribution among all participants. Second, the risk sharing mechanism involving government, banks and firms, will not only make the establishment of such an innovative system possible, but also create risk pool for the blockchain based lending and borrowing.