When it comes to the rising importance of blockchain technology, some recent numbers begin to tell a compelling story:

• An overwhelming majority of North American and European banks are exploring blockchain
• Blockchain can potentially reduce bank infrastructure costs by 30%
• Daimler, a leading global auto manufacturer recently issued a $114 million promissory note using blockchain – and did so significantly faster than if traditional banks had mediated the issuance
• Nine states are considering or have written into law the use of blockchain technology:

Arizona (passed into law)

Nevada (passed into law)

Delaware (passed into law)

California (legislation introduced)

Illinois (legislation introduced)

Maine (legislation introduced)

New York (legislation introduced)

North Dakota (legislation introduced)

Vermont (legislation introduced)

The basics

A perusal of the financial news shows that blockchain is capturing the imagination of many in the industry as the technology begins to find real-world application. This makes it an opportune moment to ponder some of the implications of this developing technology for commercial lending, in particular. First though – because the notion of blockchain is still gaining currency – a quick bit of context-setting. Having emerged first as a way to secure transactions using crypto-currency (e.g., Bitcoin), blockchains are globally distributed digital databases. Their fundamental value lies in their capacity to enhance the security of transactions by ensuring accuracy and transparency between parties. Blockchain allows you to modify only what you own and ensures that everyone has access to the same records at the same time. The technology allows a user to send value anywhere in the world, as long as a chain can be accessed.

Blockchain and Financial Risk Management

While the ubiquity of technology in contemporary life is often taken as a given, the digitalization of key areas of business is a still-evolving process. For example, many fundamental processes in the financial marketplace continue to be rooted in our paper-based past. Consider how we approach due diligence and the securitization of assets: Validating the existence of an asset and verifying who owns it is still subject to reference back to the paper trail. Not only does this warrant expensive and time-consuming processes, it comes with a high degree of risk. Much of this risk has to do with verification and visibility: Do I have access to the data for making informed decisions, and can I trust its accuracy? Blockchain enables the independent verification of a client and the ownership of assets – both key to due diligence and compliance.

In short, risk management is fundamental to sound lending. Technologies that increase transparency and accuracy, then, are inherently appealing to savvy financial managers. This helps to explain the growing interest in blockchain, which promises to be another key step in our digital migration.

From promise to practical use: Hypotheses

The appeal of a technology like blockchain is clear. But, just how it will be applied? And with what ultimate impacts? Not only the answers but the questions themselves are open and interesting – from how blockchain might shape finance generally to its potential practical impacts for specific processes in the financial ecosystem. Here, I raise just a few queries for how blockchain might affect the practice of commercial lending and asset securitization.

• Can blockchain transform lending in ways that allow smaller businesses and other new players to access financial resources?
• Over 30% of small businesses do not have access to adequate lending; they may often be considered too high risk
• Traditional ways of evaluating risk often don’t apply to them (credit histories, etc.)
• By providing increased transparency and security, blockchain can potentially give (traditional) lenders greater confidence in serving small businesses
• It can open up new ways for bigger banks to service these smaller customers, creating opportunities for both
• This could enable bigger banks to more effectively compete with the fintech players who are already addressing the small business space, re-leveling the playing field
• This has the potential to spur greater competition for winning these smaller customers, which will bring them further advantage
• New approaches can also potentially reduce the cost of servicing loans

This is just one area of impact that blockchain might have. Other key questions include:

• Could blockchain be a technological holy grail that makes lending 100% transparent?
• What is the potential for traditional players in loan securitization to adopt blockchain technologies? This presents as disruption from within rather than displacement.
• How can traditional players in loan securitization use blockchain to develop/offer new and added sources of value – such as even greater transparency, trust and verification between parties, etc.?
• What are the ways in which our regulatory/compliance framework will adopt blockchain?

In conclusion

Emerging technologies often create moments of opportunity for existing players and new entrants alike. We find ourselves at such a moment, today, with blockchain. Time – as well as testing various approaches – will tell exactly how those opportunities pan out. We will discover and develop the particular uses to which blockchain can be put. But, before we establish those practical applications, the first step is to ponder the possibilities. The pleasure of discovery lies not just in the pursuit of answers, but in the formulation of the questions and hypotheses themselves. The queries posed here are just a few of the paths that may lead to new ways of thinking and new methods of applying blockchain within commercial lending.

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