Blockchain Comes to Asset-Backed Debt With First Bonds in Sight

June 6, 2018, 5:42 PM

Bonds backed by car loans and mortgages are the latest corner of finance poised to adopt technology commonly used for cryptocurrencies like Bitcoin.

Securitization specialists at law firms including Morgan, Lewis & Bockius LLP and DLA Piper say the first blockchain-based transactions could come as early as this year. Both companies are sending partners to discuss the role of so-called blockchain in a panel discussion on the issue at the annual Global ABS conference in Barcelona on Wednesday.

“There’s a lot of hype about blockchain, but I am working on actual deals right now,” said Matthew Duncan, a partner and head of Morgan, Lewis & Bockius’s London-based securitization practice, who expects to see the first blockchain securitization by mid-2019. “Securitization will change fundamentally.”

Blockchain was designed to keep a digital ledger of information and may be suitable for ABS market where notes are typically backed by thousands of individual loans, involving reams of data and multiple intermediaries. Its enthusiasts say every part of a securitization’s life-cycle, from originating loans to structuring a deal and selling notes to investors, can be improved by the technology.

The technology may prove to be a “game changer” for capital markets, making it easier for securities to be issued and traded more efficiently, said Nicholas Curmi, who heads the securitization practice at Maltese law firm GANADO Advocates and is also speaking on the blockchain panel in Barcelona. It’s also under scrutiny by participants in other branches of finance, including leveraged loans and bank bonds.

Putting transaction data on a blockchain will increase its reliability, reduce the need for reconciliation and increase the speed with which the information is transmitted to the market, according to Eli Stern, New York-based principal in EY’s structured finance practice and a fourth speaker on the panel.

And in a market where investors typically rely on quarterly updates to assess changes in underlying collateral performance, blockchain will increase transparency, said Duncan.

But while shaking up securitizations may reduce costs and improve efficiency, questions remain over how willing buyers and sellers of the debt will be to engage with the technology, said Martin Bartlam, partner and head of international finance at DLA Piper. Bartlam expects the first blockchain-based securitization will be issued this year.

“It’s hard to say how long it will take before blockchain is embraced widely by originators, not because of any question about the working of the technology but because the hardest thing in bringing about change is always the length of time it takes people to adapt,” he said. “Two or three years ago if you talked to banks about blockchain in loan settlement they were very skeptical, but now they are all working on blockchain projects.”

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