I attended the LSTA’s annual loan ops and settlement conference last week to poll the industry on when they think blockchain/distributed ledger technology will have a significant impact on syndicated loans. Estimates varied from “18 months” to “never.”
Following is a brief breakdown of blockchain/distributed ledger technology:
- What ablockchain is (in laymen’s terms).
- What impact it will have on loans.
- When– if ever – a blockchain/distributed ledger solution will take root.
Blockchain – a decentralized database – is an enabling technology, not a wholly baked solution. This means that applications need to be built on top of it for the technology to be impactful. According to Christine Scaffidi, Misys’s Commercial and Syndicated Lending Operations Manager, three core elements differentiate blockchain from traditional centralized models:
- How is the data stored?
It is distributed across different nodes.
- How is the data validated?
Through decentralized, consensus algorithms.
- How is the data encrypted?
Each individual packet of data is encrypted.
Impact on the loan industry
Conference panelists indicated that the most impactful development within the loan industry would be to use “smart contracts” to automate asset-servicing functions. A smart contract can link or map human prose to computer prose in a syndicated loan. For example, when issuing a letter of credit, you can embed within the code the condition upon which funds will be released, essentially allowing for self-executing contracts. Because the blockchain database is decentralized and no one person controls it, loan dispute reconciliation can happen more accurately.
Loan industry poll
At the Intralinks booth we asked conference attendees when they thought a blockchain/distributed ledger solution would realistically take root. Here were the results:
According to LSTA, Synapse and Markit estimate having market-ready solutions within two years. Other panelists say, “We’ve made really good progress in the past year or so, and this is happening faster than you think.”
Like any new technology implementation, somebody has to be the first to adopt it, but nobody seems willing to do that. I spoke to a few of the attendees who mentioned this hesitation is partly psychological. Decentralizing, in a certain sense, means removing the intermediary; are banks comfortable with this? Part of the reticence also has to do with the fact that challenges still need to be addressed, such as whether or not we want to see a complete overhaul, or whether blockchain will integrate with existing systems. The jury is still out, but I agree with the consensus that it will be about two years until we see a true impact.