Credit Pool Tokeniser

‘Disruption’ is a word often used in connection with the blockchain, i.e. distributed ledger technology. It is obvious that distributed ledger technology has the potential to be fundamental to financial services, especially structured products. This transformation will not occur in all areas in the short term, but it will be sudden once apparent – which is why it is key to be prepared.

Deloitte not only offers support with various products, but we are on the forefront of this innovation. This applies to our Credit Pool Tokeniser, as well as to our Blockchain Institute, which offers further blockchain focused services.

1. Our Credit Pool Tokeniser (CPT)

Currently, it is not an easy task for market participants to figure out where to start in this field, given the immaturity of the markets, technology, regulation and, most importantly, standards. Orientation, analysis, pilots, practice, and bold steps are needed.

One of Deloitte’s offerings is the Credit Pool Tokeniser (CPT), a cutting-edge distributed ledger solution for transforming a credit pool into digital assets and distributing them in the markets. It contains a choice of various options, is flexible in terms of product groups and covers credit treasury transactions such as securitisations, syndications, and debt funds.

In technical terms, the Credit Pool Tokeniser is ready to pilot, i.e. tailor to specific cases in collaboration with our clients and set up pilot transactions.

2. Situation

Active balance sheet and risk management is essential to enterprises, particularly to those in the financial services sector. On a broader scale, credit treasury products that foster risk sharing and credit investments can help deliver on the promise of a more diverse funding landscape for the real economy, giving the financial system stability through diversification.

Credit treasury transactions offer a way to serve those needs. They are already well established in parts of the market but have limits in terms of efficiency, costs, and flexibility. They often involve lengthy reconciliation and settlement procedures, a lot of manual work, multiple sources of information, and suboptimal transparency. Consequently, credit treasury solutions remain below their potential. Many transactions do not take place because they are too costly, too small to reach the relevant cost/benefit threshold, or too inflexible to keep up with the changing economic environment and new regulatory requirements.

A solution that delivers on higher automation and fewer transaction parties combined with greater transparency and therefore reliability can change this situation fundamentally: Our Credit Pool Tokeniser delivers prerequisites for unlocking unused potential.

3. Background - Distributed Ledger Technology

There has been much hype around distributed ledger technologies in financial services. However, success in this area requires careful collaboration between regulators, incumbents, other emerging technologies, and additional stakeholders.

When people hear about blockchain or distributed ledger, they usually think ‘Bitcoin’. This refers to a crypto-currency that is independent of conventional payment systems. It is operated in a ‘permissionless blockchain’ (or public blockchain) which contains an intelligent, decentralized verification mechanism to overcome the trust gap between participants.

On the other hand, ‘permissioned blockchains’ (also referred to as ‘private’ or ‘consortium’ blockchains) have potential that is no less revolutionary, the reason being that permissioned blockchains do not face the capacity constraints, high energy consumption, and slow processing that their permissionless counterparts do.

One of the most promising use cases of permissioned blockchains is the sector of securitisation.

They allow the deployment of machines (smart contracts) for administering large parts of securitisation and give stakeholders access to a single source of truth and an unchangeable record of all steps taken. Consequently, the securitisation process gains efficiency and reliability, allowing us to rethink the whole process and eliminate redundancies.

The question is therefore not ‘if’, but ‘when, how, and to what extent?’.

4. Vision

The vision of the distributed ledger in securitisation is that of a backbone as a single source of truth meandering through the whole of the structured transaction:

This backbone provides fundamental enhancements in terms of efficiency, transparency, traceability, reliability, and cost-benefit ratio, and makes several parties redundant.

5. Status Quo

On the detail level, this simple principle becomes more complex: It is not just one blockchain but several blockchain modules (payment layer, asset layer, transaction layer, notes layer, internal/external blockchain) that need to be combined and interconnected. The technology provides for various applications that, once developed and tailored diligently, have the potential to truly reinvent securitisation. However, it is at an early stage; regulation, legal framework, and standardization are lagging behind.

On the other hand, it is not so much the fully-fledged solution that we should aim for. In a step-by-step approach, partial solutions and pilots can be implemented and executed in order to realize efficiency gains now. The Credit Pool Tokeniser follows the idea of thinking big but starting small.

6. Deloitte's Services

As well as the Credit Pool Tokeniser, Deloitte offers services in the field of blockchain and distributed ledger technology to enhance balance sheet and risk management.

Literature

1)   Blockchain in securitisation - The reinvention of the structured finance         industry?
2)   Over the horizon: Blockchain and the future of financial infrastructure -                Research from Deloitte & the World Economic Forum
3)   Beyond Fintech: A pragmatic assessment of disruptive potential in financia        services
4)   Banking on a public platform - How blockchain can change banking
5)   Blockchain technology for investment management firms - Advancing        asset management technology
6)   Blockchain in commercial real estate: The future is here - How blockchain-             based smart contracts could revolutionize commercial real estate
7)   Six Control Principles for Financial Services Blockchains
8)   Evolution of blockchain technology - Insights from the GitHub platform
9)   Come together - Blockchain consortia in the financial services industry