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Blockchain will transform ABS, but needs ‘proof of concept’

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By Max Adams
06 Jun 2018

Blockchain technology will be a wide ranging structural improvement to underlying infrastructure of the securitization market, said panellists on Wednesday, but the technology is going to need a “proof of concept” before institutions will be convinced to move away from legacy systems.

Speakers compared blockchain to the advent of email, and told the audience that in the future, issuing deals using the traditional methods will be akin to conducting business via fax today.

Securitization issued on the blockchain has been talked about for at least the past year, but the market has yet to see a real world example. Part of the problem, according to Eli Stern, principal at EY, is that large firms that issue traditional securitizations are simply too entrenched in their existing systems.

“The issue is that you’re really wed to these legacy system. You need adoption, and you need to get everybody to agree that this is the right way to go,” said Stern.

This was echoed by the other speakers, who said that the task of wrangling decision makers within a large issuing institution — from compliance officers to heads of technology — and getting them all to agree on blockchain implementation is an exceedingly difficult task. Additionally, it may be the case that larger firms are hesitant to adopt the technology because it could mean lowering the barrier to entry for new players.

In a departure from a panel on day one, during which attendees were told that financial technology was going to be revolutionary for large financial institutions, speakers on the blockchain panel were keen not to oversell the potential of the technology.

Hossein Kakavand, CEO of Luther Systems, was not shy about the fact that blockchain is “overhyped”, and that institutions should not look at distributed ledger technology as a solution to every problem. Most of its use for securitization professionals will be in streamlining and securing existing systems that ABS pros rely on already, such as loan databases and payment waterfalls.

“For whoever is championing blockchain within an organisation…there are others that will think it is snake oil. So it is quite important to not to overhype and have a sober view of what it can and cannot do and bring other folks on the journey to implementation,” Kakavand said.

The ins and outs of implementing blockchain on a firm level are “very nitty gritty”, Kakavand said. Firms will have their own internal rules and processes for implementing new technology and the approval process can be months long.

A first mover in the ABS market with regards to blockchain would potentially clear the hurdle of wider adoption. However, regulation is also an issue, and a patchwork approach that is being seen today will hobble the use of blockchain going forward. Martin Bartlam, partner and head of international finance and projects at DLA Piper, said that there are already problems with inconsistent regulation that is holding back some firms who have issued digital tokens.

“We’re already seeing a patchwork of regulations impacting [distributed ledger technology]…and that poses a problem. It results in a great deal of complex analysis if you are doing a multi-jurisdictional offering,” Bartlam said.

“Innovation constantly outpaces regulation,” added Nicholas Curmi, head of securitization at Ganado Advocates. “We have an environment with all these participants operating with high levels of uncertainty”.

As for predictions, panellists were not keen to set any lofty goals, and sidestepped saying when the market might see an actual deal issued on the blockchain.

“I’m done with predictions,” Stern said. “It’s going to happen, hopefully soon so we can stop talking hypothetically. I think you could see it from a fintech [company] or maybe a consortium.”
By Max Adams
06 Jun 2018