Equifax, TransUnion, Experian FICO Scores Grow Increasingly Inaccurate with Wider Crypto Adoption

5 min readJun 24, 2021

The total amount of Americans with cryptocurrency holdings doubled from 7.95% in 2018 to 14.4% in 2019. Today, 59.1 million Americans (28 percent of the adult population) own some form of crypto. At the same time, employees around the world increasingly select cryptocurrency as an alternative to fiat compensation, including prominent athletes in the CEBL, NBA, NFL and Nascar. Decentralized finance (DeFi) loans are also showing tremendous growth. Lenders like Genesis saw an increase in DeFi lending of 400% from $465 million in Q4 2020 to $2.4 billion in Q1 of 2021. MasterCard and Visa have also announced cryptocurrency support. When you consider that cryptocurrency did not exist a decade ago, and yet is currently worth $1.56 trillion, you begin to appreciate why crypto and decentralized finance are now essential asset classes in the modern finance landscape.

Every sector of the modern financial system has acknowledged the resilience of decentralized finance as an inescapable component of our financial future, with one egregious omission: FICO credit scores. FICO credit scores have long been the tool of choice in Institutional finance for quickly evaluating a prospective lender’s creditworthiness. It excels at being a quick, portable, and complete summary of a borrower’s financial capability. However, the inherently anonymous nature of DeFi presents a unique challenge to this type of system that relies heavily on identity verification. To date, none of the “Big Three” credit bureaus, TransUnion, Equifax, or Experian have produced a solution to this problem. This failure means as crypto gains more and more user adoption, FICO credit ratings will become progressively inaccurate as a tool for financial assessment.

Big Problem; Big Opportunity

The Problem

The anonymous nature of cryptocurrency presents the most obvious problem for FICO scores. A borrower’s financial commitments — positive or negative — are invisible to the Bureaus. Credit utilization obfuscation is a less obvious challenge presented as a result of the proliferation of DeFi, — specifically Crypto loans. This threat is illustrated perfectly in an excerpt from an article published by BlockFi entitled, “Will a Crypto Loan Affect my Credit Score?”

Carrying significant balances across your credit cards can drag down your credit score. ‘Credit utilization’ is dictated by those carried balances and is calculated by taking your statement balances and dividing it by your credit limits. This calculation makes up 30% of your credit score. The lower the utilization, the better. Typically utilization at around 25% of total credit card limits starts to hurt your score.

Some BlockFi clients use their loan to pay down those outstanding balances. This can go a long way towards improving your FICO and credit scores.

Because of the significance FICO scores give to credit utilization, obfuscation has the potential to significantly invalidate the score.

The Opportunity

For many, the catalyst for the departure from decentralized finance has more to do with opportunity than obfuscation. Solving the DeFi/FICO problem will not only improve the accuracy of the FICO scores, it will help give insight for developing more compelling products for those underserved by traditional financial products.

Utilization obfuscation is a critical problem for both DeFi and FICO credit rating agencies. Those who pioneer innovations that solve this issue will undoubtedly create new opportunities in the other.

The Solution: How LedgerScore solves FICO’s DeFi problem with LedgerScore GhostIdentity

Introducing LedgerScore GhostIdentity

Wallet addresses are like bank accounts. The accuracy of any DeFi transaction history is directly proportional to the completeness of each user’s decentralized financial identity — that is, across as many financial properties (wallets, loans, tokens etc.) as possible. LedgerScore GhostIdentity was created as a secure, anonymous, and easy way to associate your financial identity across the entire DeFi landscape.

While LedgerScore GhostIDs are anonymous by design, they provide a user with the portability to leverage their DeFi identity in traditional finance. LedgerScore envisions a future where a user has the choice to have their LedgerSore GhostIdentity verified by a bank via our partner API and utilize a favorable DeFi transaction history to secure a loan in traditional finance.

Similar to Bank API access, FICO bureaus will have the ability to allow users to associate their LedgerScore GhostIdentity with their FICO credit ratings.

Beyond LedgerScore GhostIdentity

LedgerScore GhostIdentity is just one of three (3) core technologies that combine to solve some of the toughest problems plaguing DeFi lending. Here are the other two:

LedgerScore DeFi credit score
LedgerScore GhostSignature

LedgerScore Credit Score

LedgerScore scores are calculated by a proprietary scoring engine produced in collaboration with some of the largest DeFi lenders. LedgerScores are generated by a combination of deterministic and intelligent systems. The deterministic layer of the score is calculated by evaluating a variety of on-chain behaviors to extrapolate key markers such as transactional activity, preferred token mix, combined balance across all wallets and locked tokens (or utilization). LedgerScore GhostIdentity also opens up a unique opportunity to extract intelligence across a combined crypto identity — that is, spanning several wallets and currencies to create the most accurate image of the borrower.

The second layer of the score is calculated based on our Artificially Intelligent Risk Inference engine, A.R.I.. On a very high-level, A.R.I. ingests detailed transactional data across several wallets and compares them against prototypical data models from successfully executed loan agreements. In essence, with the help of our DeFi Lending partners, A.R.I. is able to extract high and low risk patterns. The best part about A.R.I. is, with each loan execution it becomes more accurate. A.R.I. is part of LedgerScore’s big plays towards finally meeting the Industry goal of automated, DeFi loan risk assessment. We believe it is one of the final pieces necessary to realize the full disruptive potential of decentralized finance.

LedgerScore GhostSignature

The primary goal of LedgerScore is to provide our users with the most competitive loan rates, and for our DeFi loan partners, the best tools to evaluate prospective borrower risk. LedgerScore GhostSignatures were created as an optional, supplementary risk mitigation protocol for DeFi lenders.

At a very high level, LedgerScore GhostSignatures allow a LedgerScore user to collateralize their verified KYC in the form of a double-blind smart contract. When a borrower successfully repays a loan initiated with a GhostSignature it closes the smart contract and the borrower’s KYC is never revealed. The borrower’s GhostIdentity is updated to reflect the successful repayment of the loan, and a score bonus is applied.

In the event of a default, the borrower’s KYC will become available to the Lender. This enables traditional, legal forms of collection, significantly increasing the probability of recovery.

Conclusion

Blockchain technology presents a unique opportunity to completely disrupt traditional finance systems. LedgerScore is fully invested in realizing the full potential of the decentralized finance future, and are committed to building the tools to make it possible.