ASSIGNMENT-2

A Group Project on Changes

in Blockchain Technology
and its Impact.

ABSTRACT
It focuses on equipping the ongoing changes in blockchain technology and AI/ML and their impact on
underwriting and lending.

SUBMITTED TO: - Prof. Neha Kukrety

SUBMITTED BY: - Himani Goyal(0211PGM095)

Ayush Kumar(0211PGM126)
Anupam Singh(0211PGM094)
Aayushi Agarwal(0211PGM097)
Anubhav Gupta(0211PGM076)
 Introduction
This project aims to explore the impact of ongoing changes in blockchain
technology and artificial intelligence/machine learning (AI/ML) on
underwriting and lending. Specifically, the focus is on the use of blockchain and
AI/ML in the context of lending to small and medium-sized enterprises (SMEs)
and micro, small, and medium enterprises (MSMEs) in the selected country of
the United Kingdom (UK).

The methodology involves researching and analyzing the current state of

blockchain and AI/ML implementation in SME and MSME lending in the UK.
The project will focus on key areas such as the role of decentralized finance
(DeFi) in lending, the use of robo credit counselors, the speed of credit
approval, the development of dynamic credit rating systems, and the
improvement of risk management.

By examining these key areas, this project seeks to equip students with a
comprehensive understanding of the ongoing changes in blockchain and AI/ML
technology in lending and the potential benefits and challenges of adopting
these technologies in SME and MSME lending in the UK.

Country: United Kingdom (UK)

The UK has been a leader in the adoption of blockchain technology and

artificial intelligence/machine learning (AI/ML) in the financial sector. The
government has taken several initiatives to promote these technologies,
especially in the lending space, to improve access to credit for small and
medium-sized enterprises (SMEs) and micro, small, and medium enterprises
(MSMEs).

Role of DeFi in Lending:

Decentralized Finance (DeFi) is a promising area that has the potential to
revolutionize lending in the UK. The use of blockchain technology enables the
creation of smart contracts that can automate the lending process and eliminate
intermediaries, reducing the costs of lending. DeFi protocols allow for peer-to-
peer lending, which can increase access to credit for SMEs and MSMEs that
may not meet the criteria for traditional lending.

In the UK, DeFi platforms such as Celsius and Nexo have emerged to provide
decentralized lending solutions. These platforms allow borrowers to obtain
loans using cryptocurrency as collateral, with no credit checks or lengthy
approval processes.

One example of the role of DeFi in lending in the UK is the platform Nexo.
Nexo is a DeFi lending platform that allows users to borrow against their
cryptocurrency assets. Users can deposit their crypto assets as collateral, and
then borrow fiat currency (such as GBP) or stablecoins (which are
cryptocurrencies pegged to the value of a fiat currency) at a fixed interest rate.

One advantage of DeFi lending platforms like Nexo is that they can provide
users with access to credit without the need for traditional credit checks or
collateral. Instead, users can use their cryptocurrency assets as collateral, which
can be more accessible and flexible for some borrowers.

Another advantage of DeFi lending platforms is that they often operate on a

decentralized blockchain network, which can provide greater transparency and
security for borrowers. Because transactions are recorded on a public
blockchain, there is less risk of fraud or manipulation, and borrowers can have
greater confidence in the lending process.

However, one challenge with DeFi lending platforms is that they may be more
susceptible to price volatility and market fluctuations in the cryptocurrency
market. This can pose a risk for borrowers who use their cryptocurrency assets
as collateral, as the value of their collateral may fluctuate over time.

Overall, DeFi lending platforms like Nexo are an innovative and growing area
in the UK lending industry. By leveraging blockchain technology and
cryptocurrency assets, these platforms are providing new opportunities for
borrowers to access credit and for lenders to diversify their lending portfolios.
However, it is important for borrowers to understand the risks involved with
using cryptocurrency assets as collateral, and to carefully consider their options
before borrowing from a DeFi lending platform.

Robo Credit Counsellor:

AI/ML has the potential to enhance the lending process by improving credit
scoring and risk assessment. Robo credit counselors are AI-based tools that use
machine learning algorithms to provide personalized credit advice to borrowers.
These tools can analyze data from various sources, including social media, to
generate a more accurate credit profile of the borrower.

In the UK, startups like Credit Ladder and Credit Kudos are using AI to create
personalized credit scores for borrowers. These platforms use alternative data
sources to provide more accurate credit assessments and improve access to
credit for SMEs and MSMEs.

One example of a Robo credit counsellor in the UK is the platform called

Credit Kudos. Credit Kudos is a fintech company that uses machine learning
algorithms to analyze a user's credit data and provide personalized credit advice.

Credit Kudos uses open banking to access a user's financial data, such as
transaction history and income data, to create a credit profile. The platform then
uses machine learning algorithms to analyze the data and provide users with
personalized credit advice, such as how to improve their credit score or what
credit products may be suitable for them.
One advantage of Robo credit counselors like Credit Kudos in the UK is that
they can provide more personalized and accurate credit advice compared to
traditional credit bureaus. By using open banking data and machine learning
algorithms, these platforms can analyze a user's financial data in real-time and
provide more relevant recommendations.

Additionally, Robo credit counselors can help improve financial literacy and
education in the UK by providing users with easy-to-understand information
about their credit data and how it impacts their financial health. This can help
users make more informed decisions about their finances and improve their
overall financial well-being.

However, one challenge with Robo credit counselors is the potential for
algorithmic bias. If the algorithms are not designed and tested properly, they can
inadvertently perpetuate existing biases in the credit system. It is important for
companies like Credit Kudos to ensure that their algorithms are unbiased and do
not discriminate against certain groups of people.

Overall, Robo credit counselors like Credit Kudos are an important innovation
in the UK lending industry. By using machine learning algorithms to analyze
credit data, they can provide more personalized and accurate credit advice,
which can help improve financial inclusion and literacy for individuals and
businesses alike.

Speed of Credit Approval:

The traditional lending process in the UK can be time-consuming, with a

significant amount of paperwork and verification required. However, the use of
blockchain technology and smart contracts can significantly reduce the time
required for credit approval.

Platforms such as Vyne and Funding Xchange are leveraging blockchain

technology to create a more streamlined lending process. These platforms allow
for real-time loan disbursement and repayment, reducing the time required for
credit approval and improving access to credit for SMEs and MSMEs.
One example of speed of credit approval in the UK is the online lender Zopa.
Zopa is a peer-to-peer lending platform that uses technology to provide faster
and more efficient loan processing compared to traditional lenders.

One example of speed of credit approval in the UK is the online lender Zopa.
Zopa is a peer-to-peer lending platform that uses technology to provide faster
and more efficient loan processing compared to traditional lenders.

Zopa uses machine learning algorithms to analyze loan applications and

determine creditworthiness, allowing them to quickly assess whether a borrower
is eligible for a loan. This process is much faster than traditional lenders, who
often require extensive documentation and manual underwriting processes.

Additionally, Zopa uses open banking to access a borrower's financial data,

allowing them to verify income and other financial information more quickly
and accurately. This further streamlines the loan approval process and allows
for faster decision-making.

One advantage of faster credit approval processes like Zopa in the UK is that
they can provide borrowers with access to credit more quickly and efficiently.
This can be particularly important for individuals and businesses who may need
access to funds quickly to take advantage of business opportunities or cover
unexpected expenses.

However, one challenge with faster credit approval processes is the potential for
increased risk. If lenders are too focused on speed, they may not thoroughly
assess the creditworthiness of borrowers, leading to higher default rates and
financial losses.

Overall, faster credit approval processes like Zopa are an important innovation
in the UK lending industry. By using technology to streamline loan processing,
they can provide borrowers with faster access to credit, while still ensuring
responsible lending practices are in place to mitigate risk.

Dynamic Credit Rating:

AI/ML can also enable the creation of dynamic credit rating systems that can
adjust credit scores in real-time based on changing circumstances. These
systems can provide more accurate credit assessments and reduce the risk of
defaults.

In the UK, companies like Credit Kudos and Aire are using AI to create
dynamic credit rating systems. These platforms analyze a range of data sources
to provide borrowers with a more accurate credit profile that can adjust in real-
time based on changing circumstances.

One example of dynamic credit rating in the UK is ClearScore. ClearScore is a

fintech company that provides users with free credit scores and reports, as well
as personalized advice on how to improve their credit rating.

ClearScore uses machine learning algorithms to analyze a user's credit data in

real-time and update their credit score and report accordingly. This allows for a
more dynamic credit rating, as changes in a user's credit data are reflected in
their score immediately.

One advantage of dynamic credit rating systems like ClearScore in the UK is

that they can provide users with more accurate and up-to-date credit
information. This can be particularly important for individuals who may be
applying for credit in the near future and want to ensure their credit data is
accurate and up-to-date.

Additionally, dynamic credit rating systems like ClearScore can help users
improve their credit rating by providing personalized advice on how to improve
their credit score. By analyzing a user's credit data, the platform can provide
targeted advice on areas where they may be able to improve, such as paying
down high balances or reducing credit utilization.

However, one challenge with dynamic credit rating systems is ensuring that the
algorithms used to analyze credit data are unbiased and do not perpetuate
existing biases in the credit system. It is important for companies like
ClearScore to regularly monitor their algorithms and ensure that they are not
discriminating against certain groups of people.

Overall, dynamic credit rating systems like ClearScore are an important

innovation in the UK lending industry. By providing users with more accurate
and up-to-date credit information, they can help individuals make more
informed decisions about their finances and improve their overall financial well-
being.

Risk Management:

Finally, AI/ML can improve risk management in lending by providing more

accurate risk assessments and fraud detection. AI-based tools can analyze large
amounts of data in real-time to identify potential risks and fraud, enabling
lenders to take proactive measures to mitigate these risks.

In the UK, companies like Feature space and ComplyAdvantage are using
AI/ML to improve risk management in lending. These platforms use machine
learning algorithms to analyze data and provide more accurate risk assessments,
reducing the risk of defaults and fraud.
One example of risk management in the UK is the use of credit risk models by
traditional lenders. Credit risk models are statistical models that use data on past
borrower behavior and other factors to predict the likelihood of default on a
loan.

Credit risk models allow lenders to make more informed lending decisions by
assessing the creditworthiness of a borrower and estimating the potential risk of
default. This helps lenders to manage their risk and make more responsible
lending decisions.

In addition to credit risk models, traditional lenders in the UK also use other
risk management tools such as credit scoring, underwriting standards, and loan
covenants to manage their risk exposure.

However, one challenge with traditional risk management tools is that they can
be slow and inefficient, and may not always accurately predict the likelihood of
default. This is where new technologies such as blockchain, AI and ML come
into play.

Blockchain-based lending platforms and other fintech companies in the UK are

developing new risk management tools that leverage these technologies. For
example, some platforms use blockchain to create smart contracts that
automatically execute loan agreements and ensure that borrowers meet their
obligations. Others use AI and ML algorithms to analyze borrower data and
make more accurate lending decisions.

Overall, risk management is an important aspect of lending in the UK, and

traditional lenders as well as fintech companies are constantly developing new
tools and strategies to manage their risk exposure. By using a combination of
traditional and new technologies, lenders can make more informed lending
decisions and reduce the risk of default.

Conclusion:

In conclusion, the use of blockchain technology and AI/ML has the potential to
significantly improve lending to SMEs and MSMEs in the UK. The adoption of
DeFi protocols, robo credit counselors, dynamic credit rating systems, and
improved risk management tools can increase access to credit for these
businesses and reduce the risk of defaults and fraud. The UK government's
efforts to promote these technologies are expected to drive further growth and
innovation in the lending sector.
THANKYOU