Blockchain in Securitisation and Credit Treasury
The future starts now
“Disruption” is a word often used in connection with the Blockchain – or more generally speaking with the distributed ledger – technology, sometimes also “hype”. Without contributing to this discussion: we believe that the effect of the distributed ledger technology has the potential to be fundamental to financial services and structured products in particular. The effects will not take place in the short-term in all areas but will likely be all the more comprehensive. Also foreseeable is that certain steps of evolvement will be first hidden, then sudden. It is key to be prepared!
Deloitte is not only supporting with various products, we are on the forefront of this innovation. See, with regard to structured credit products, below (1.) regarding our Credit Pool Tokeniser and (6.) regarding further services. With a broader focus, also visit the site of our Blockchain Institute.
1. Our Credit Pool Tokeniser (CPT)
That said, currently it is not an easy task for market participants to figure out, where to start in this field, given the immaturity of markets, technology, regulation and, most importantly, standards. Nobody wants to bet on the wrong horse. Orientation, analysis, pilots, practice and bold steps are needed.
Deloitte contributes, among other things, the Credit Pool Tokeniser (CPT). It is a cutting edge distributed ledger solution to transform a credit pool into digital assets and distributing it into the markets. It contains various options to choose and is flexible in terms of product groups, covering securitisations, syndications, debt funds et al.
The Credit Pool Tokeniser is technically ready to pilot, i.e. tailor to the specific case in collaboration with you, our client, and set up a pilot transaction.
Credit Pool Tokeniser: Moving your balance sheet management to the next level!
Active balance sheet and risk management is essential to enterprises, particularly to those in the financial services sector. On 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, such as securitisations, debt funds or supply chain finance solutions, principally offer a way to serve those needs. They are already well established in parts of the market in principal, but have their limits in terms of efficiency, costs and flexibility. They often involve lengthy reconciliation and settlement procedures, a lot of manual work, various 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, too inflexible to keep up with the changing economic environment and new regulatory requirements.
A solution that delivers on higher automation, fewer transaction parties combined with higher transparency and hence reliability can change this situation fundamentally: Our Credit Pool Tokeniser delivers prerequisites to unlock unused potential.
3. Background - Distributed Ledger Technology
There has been much hype around distributed ledger in financial services. We took a closer look, in partnership with the World Economic Forum, and believe that this technology indeed has the potential to ‘live-up to the hype’ and reshape financial services profoundly. To be successful, however, it requires careful collaboration from 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 from conventional payment systems. It is operated in a ‘permissionless blockchain’ (also ‘public’ blockchain) which contains an intelligent, decentralised verification mechanism to overcome the trust gap between participants. But that is only part of the story.
Despite their absence from the public limelight, ‘permissioned blockchains’ (also referred to as ‘private’ or ‘consortium‘ blockchains) have no less revolutionary potential. Their key characteristics, though, can largely differ from those of a permissionless blockchain. Some of the greatest challenges permissionless blockchains are currently struggling with – such as capacity constraints, high-energy consumption and slow processing – are non-issues with permissioned blockchains.
One of the most promising use cases of permissioned blockchains is the sector of securitisation and other credit treasury transactions. Simply recall that, as early as decades ago, market participants described the prevailing principle of a securitisation vehicle as that of an ‘autopilot’, believing that personnel should administer the vehicle like a machine according to the set rules. A permissioned blockchain, together with smart contracts, now give the industry the ability to perfect this principle by actually deploying machines (smart contracts) to administer large parts of the securitisations and, at the same time, allowing stakeholders to gain access both to a single source of truth as well as to unchangeable records of all steps taken. In this manner, the securitisation processes can be made far more efficient and reliable, allowing us to rethink the whole securitisation process and eliminate redundancies.
Accordingly, with respect to Blockchain and more generally Distributed Ledger, the question for the securitisation and the credit treasury industry is not ‘if’, but ‘when, how, and to what extent?’
The vision of Distributed Le4. Visiondger in securitisation is that of a backbone being a single source of truth meandering through the whole of the structured transaction:
his backbone provides fundamental enhancements in terms of efficiency, transparency, traceability, reliability, cost-benefit ratio et al. Even several transaction functions and transaction parties may become redundant.
This is not only well sounding in theory but is also the result of a large-scale study we conducted in 2017, ‘Applying blockchain in securitization – Opportunities for reinvention’.
5. Status Quo
This simple principle becomes more complex on a more detailed level: It is not only one Blockchain but several Blockchain modules (payment layer, asset layer, transaction layer, notes layer, internal/external blockchain) that need to be well combined and interconnected.
The technology provides for various applications that, developed and tailored diligently, have the potential to truly reinvent securitisation. But: it is at an early stage, regulation, legal framework, standardisation lag behind.
On the other hand, it is not so much the fully-fledged solution that should be aimed at. In a step-by-step approach partial solutions and pilots can be implemented and executed in order to already realise efficiency gains et al. and/or to be a first mover.
6. Deloitte's Services
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 financial 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