We’re constantly hearing stories about how blockchain will impact financial services. Some call it the “Internet 2.0” and every week a new global financial firm announces a sizable blockchain project or investment. Leading us to wonder: How much of the blockchain phenomena is hype versus reality?
Right now, the benefits and potential applications of blockchain technology to financial services are obvious: efficiency, transparency, and enhanced security, to name just a few. But actually adopting and implementing blockchain technology within a traditional industry like financial services will take time and will face several hurdles, not least of which will be educating decision-makers (and regulators) about how it all really works.
However, the securities industry is one area that is likely to be improved by blockchain technology. A report put out by the Structured Finance Group and Chamber of Digital Commerce provides a thorough and comprehensive breakdown of how blockchain technology can (and will) reinvent securitization. From increasing the speed of transactions to providing enhanced security, blockchain and digitized assets promise to bring much-needed change to a century’s old industry.
Here a few main highlights from the report:
- Private is Power – the report distinguishes between public and private (permissioned) blockchains and argues that the latter will be more beneficial to the securities industry. There is a misconception that blockchain is all about open-ended access – while that is true for the public blockchains, private blockchains enabled controlled access to transactions and sensitive information. “A securitization blockchain could be designed, for example, to permit an originator to hide proprietary data and methodologies from competitors who may be on the same blockchain, reveal selected parts of this data to a targeted subgroup of investors, and offer full access to regulators.”
- Smart Contracts are the Next Frontier – A persisting challenge in the securities industry is the lack of uniform information – smart contracts (and smart securities) can help fix this. By providing a complete and immutable audit trail, smart contracts enable issuers and regulators to get a holistic view of the ownership of securities that are issued. This will organically lead to more accurate valuations and, for investors, better price discovery.
- Greater Automation Means Reduced Costs – According to the report: “Between 2008 and 2013, the cost of servicing a performing residential mortgage loan increased 264 percent, and the cost of servicing a non-performing loan rose 489 percent.” All of this was caused by the inefficiencies of loan origination and servicing that could applied to any number of assets. Blockchain and smart securities, however, can track and manage every aspect of the lifecycle of a security, from issuance to secondary trading. By doing so, it would not only create a single source of data for each security, but would significantly reduce the cost implicit in managing and trading those securities. Instead of 10 different lenders and 3rdparties becoming involved, all of the relevant data points about each asset are stored on an immutable ledger within the blockchain.
The extent to which blockchain will impact all of finance remains to be seen; but one thing is certain, innovation within the securities industries can and already is happening. It is clear that a private, permissioned portal will be needed to conduct the activity described above, and Templum is helping bring this to the forefront with innovative technology and the first financial framework for the issuance and trading of smart securities.
If you’re just getting into this space, we highly encourage you to read the full SFIG report to learn more: