Promise or Peril: Comparing P2P Lending Regulations in the United States and China
Peer-to-peer (P2P) lending is seen as an instrument for financial inclusion by expanding credit access, particularly in developing nations.[1] The industry gained prominence in the global economy in the aftermath of the 2008 financial crisis.[2] However, as the industry matured, the inherent risks and regulatory challenges became increasingly apparent. A comparison between the regulatory approaches of China and those of the United States suggest a robust financial regulatory infrastructure is essential for industry stability.
In China, P2P lending saw explosive growth after 2007, with the industry's trading volume exceeding $161 billion by 2015.[3] These platforms had mainly two categories: 'pure matching' platforms that connected borrowers and lenders, and 'guaranteed return' platforms that promised investors full reimbursement of their principal and interest, even in the event of borrower default.[4] The latter model was the most popular because it appeared to shift the credit risks from the lenders to the platforms.
Unlike the U.S. platforms where loans originate from partner banks, the Chinese platforms directly issue loans using an aggregate pool of lender funds.[5] Moreover, while the U.S. platforms raise the credit fund by issuing notes corresponding to the specific portfolio of borrower loans selected by each investor, many Chinese platforms eliminated the matching process, simply repackaged the loans and sold them as investment products with “guaranteed return.”[6]
Essentially, these Chinese platforms function similar to banks: taking deposit, offering a fixed rate of return, and lending out investors’ funds. As such, the subsequent widespread P2P platform failures in some way mirror a typical bank run. After the fall of the Ezubao in 2015, the first major platform that went bankrupt, investors flocked to redeem their notes at the other major platforms, most of which lacked the liquidity to meet the demand for “guaranteed return.”[7]
Following the massive failures, the Chinese government introduced the Interim Measures, defining P2P lending entities as "information intermediaries" and setting them apart from traditional banking and securities law.[8] These measures required platforms to register with local financial regulators, implement third-party depository mechanisms, and ensure full information disclosure.[9] Additionally, the introduction of 12 "red lines" established guidelines for acceptable practices, prohibiting guaranteed returns and self-funding by platforms.[10] Despite these regulations, the industry's downfall continued, eventually calling for a hardline rectification campaign that mandated all the P2P platforms to shut down or be converted into other FinTech businesses.[11]
The U.S. P2P lending industry, by contrast, has experienced measured growth within the framework of existing financial regulations. The SEC classified P2P notes as investment contracts under the Howey test, which subjected lending platforms to securities law, requiring registration and disclosure.[12] The JOBS Act in 2012 relaxed some of these requirements for platforms targeting accredited investors.[13] Furthermore, the federal banking regulations by the FDIC and the CFPB further ensure that fintech platforms adhered to safety and soundness standards.[14]
The United States' consistent application of securities and banking laws to P2P lending has helped mitigate inherent risks.[15] Meanwhile, China's regulatory aftermath serves as a cautionary tale for developing countries with similar financial infrastructure gaps. A healthy P2P lending industry requires a robust financial regulatory framework. As P2P lending continues to evolve globally, regulators around the world need to strike a balance between fostering innovation and ensuring stability of the financial system.
Yumi Qiu is a staff member of Fordham International Law Journal Volume XLVII.
[1] While there is no formal definition for P2P lending, economists and legal scholars have generally used two criterion to identify P2P lending: (1) the borrower-lender interaction occurs digitally, either on mobile apps or online web services, and (2) data analytics or machine learning technology is used in screening borrowers or determining interest rates. See Tobias Berg, Andreas Fuster & Manju Puri, FinTech Lending, National Bureau of Economic Research, (2021), at 3, https://www.nber.org/papers/w29421 (last visited Jan. 17, 2023); See also Vincent DiLorenzo, FinTech Lending: A Study of Expectations Versus Market Outcomes, 38 Rev. Banking & Fin. L. 725, 726 (2019), https://scholarship.law.stjohns.edu/cgi/viewcontent.cgi?article=1384&context=faculty_publications (last visited Jan. 11, 2023).
[2] See Moran Ofir & Ido Tzang, An Empirical View of Peer-to-Peer (P2P) Lending Platforms, 19.1 Berkeley Bus. L.J 175, 179 (2022).
[3] (Robin) Hui Huang & Christine Meng Lu Wang, The Fall of Online P2P Lending in China: A Critique of the Central-Local Co-Regulatory Regime, 36(3) Banking & Finance L. Rev., at 6 (2021), https://papers.ssrn.com/abstract=3869264 (last visited Jan. 13, 2023).
[4] See Chang-hsien Tsai, To Regulate or Not to Regulate? A Comparison of Government Responses to Peer-to-Peer Lending Among the United States, China, and Taiwan, 87 U. of Cincinnati L. Rev. 1077, 1090–91 (2019), https://scholarship.law.uc.edu/cgi/viewcontent.cgi?article=1305&context=uclr (last visited Jan. 13, 2023).
[5] See Robin Hui Huang, Online P2P Lending and Regulatory Responses in China: Opportunities and Challenges, 19 Eur Bus Org Law Rev 63, 71 (2018), http://link.springer.com/10.1007/s40804-018-0100-z (last visited Jan.17, 2023).
[6] Id.
[7] Neil Gough, Online Lender Ezubao Took $7.6 Billion in Ponzi Scheme, China Says, The New York Times, Feb. 1, 2016, https://www.nytimes.com/2016/02/02/business/dealbook/ezubao-china-fraud.html (last visited Jan.13, 2023).
[8] See Qin Zhou & Shanyun Xiao, Regulatory Experimentation In China’s Peer-To- Peer Lending Market, 15 Tsinghua China L. Rev. 59, 70–71 (2022), http://www.tsinghuachinalawreview.law.tsinghua.edu.cn/UploadFiles/2023-04-03/vrxvtgpzgldkvgge.pdf?My4gUDJQLnBkZg==#:~:text=It%20then%20divides%20regulatory%20experimentation,approaches%20adopted%20by%20Chinese%20regulators. (last visited Jan. 13, 2023).
[9] See id.
[10] Id.
[11] Id.
[12] In the Matter of Prosper Marketplace, Inc., Securities Act Release No. 8984, at 2 (Nov. 24, 2008), https://www.sec.gov/files/litigation/admin/2008/33-8984.pdf (last visited Jan. 12, 2023).
[13] See Jeffrey Luther, Twenty-First Century Financial Regulation: P2P Lending, FinTech, and the Argument for a Special Purpose FinTech Charter Approach, 168 U. of Penn. L. Rev. 1013, 1031 (2020), https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=9698&context=penn_law_review (last visited Jan. 12, 2023).
[14] See id.
[15] See id.
This is a student blog post and in no way represents the views of the Fordham International Law Journal.