The digital currency and asset advocacy group known as the Chamber of Digital Commerce has partnered with the Structured Finance Industry Group (SFIG), an organization focused on improving and strengthening the securities market, to bring blockchain to securitization. As a result of the partnership, a white paper has been prepared by financial consulting firm Deloitte, titled: “Applying Blockchain in Securitization: Opportunities For Reinvention.” In addition, the partnership has spurred a series of educational activities at SFIG Vegas 2017, the largest capital markets conference in the world.
“I am pleased to announce this strategic initiative with the Chamber of Digital Commerce, which has established an important position in representing the growing blockchain industry,” stated SFIG Executive Director, Richard Johns. “Partnering with the Chamber is a key part of our focus on being a central resource of forward looking education to all market participants. With this partnership we can create new, forward-thinking and educational opportunities for our members enabling them to stay fully informed of how technology is impacting their business. Today’s whitepaper is just the beginning of what we expect to be a very active and productive partnership.”
According to Deloitte, blockchain technology enables the authenticity of securities transactions and improves transparency within the market. This is important as risk-based sectors like finance remain susceptible to fraud and other white-collar schemes. The blockchain and smart contracts offer prevention in these areas by providing security, accessibility, and legal certainty to the securities market.
Securitization is a component of the financial market that is used to attract new capital, transfer real assets into financial assets, determine stable prices of supply and demand, and provide a means for both short and long term investments. Thus, it remains one of the more sensitive components of the financial sector that will be disrupted by blockchain technology, given that its introduction will primarily benefit investors, custodians, and trustees in a number of ways.
First are secure asset transfers, as the blockchain will allow for a reduction of risks to collateral-based investors. A decline in the value of securities collateralizing a loan can cause lenders to demand that borrowers put up collateral on short notice. If a borrower cannot provide any extra collateral within the designated time frame, the lender can sell as many of his or her securities as necessary to meet the deficit. The blockchain mitigates fraud in this area by reducing or eliminating the risk of unintentional and intentional “double selling” of assets. It also allows for the authenticity of ownership, which in turn streamlines the cumbersome legal processes of foreclosure, title search, and tax liens.
Secondly, the blockchain could benefit the market for trading of residential mortgage-backed and asset-backed securities by providing a robust infrastructure that leverages new opportunities. The majority of these securities are cleared and settled through the Depository Trust and Clearing Corporation (DTCC), an American post-trade financial services company that has already voiced its support for blockchain technology as a facilitator of post-trade infrastructure. According to their paper, “Embracing Disruption”:
“DTCC believes that distributed ledger technologies have the potential to address certain limitations of the current post-trade process by modernizing, streamlining and simplifying the siloed design of the financial industry infrastructure with a shared fabric of common information.”
Lastly, the blockchain could also be utilized to aid with automating actual legal documentation from top law firms by means of smart contracts.