July 5, 2017 - Last Thursday, the LSTA hosted Stephen Obie, Partner, Jones Day, and Dzmitry Maroz, Senior Manager, Deloitte Advisory, for a webcast, “Level Two: What Might Blockchain Mean for Syndicated Loans”.  Building off their first presentation, the speakers took a closer look at blockchain technology as it applies to syndicated loans.  Many first order problems facing industry efficiency – long trade settlement times, low automation and manual reconciliation – can be addressed with this technology.  One single source of truth which can be shared with participants would result in time and cost savings. With respect to the primary market, blockchain and the complementary technology, “smart contracts”, can allow for a syndicated loan to be a digital asset. For the creation of a “smart loan”, the borrower, arranger and lenders would agree on the terms of a credit agreement, which would then be coded and entered on the blockchain.   An arranger would broadcast that “smart loan” with public keys of pre-authorized syndicate institutions. Only those institutions (think intranet) can accept or negotiate terms by broadcasting signed amendments for the arranger to approve. The arranger would accept or reject those conditions and sign the final loan commitments with its digital signature. That signing causes the borrower’s collateral to be assigned to syndicate members and for funds to be disbursed from syndicate members to the borrower. Over the life of the loan, the “smart loan” automatically debits funds from the borrower’s account and simultaneously extinguishes loan liability in the “smart loan” blockchain. Because permissions can be set to make the blockchain only available to some, as ownership of the loan changes, those permissions would change in turn. The existence of the loan as a digital asset would obviate the need for each institution to manually create the loan, and instead, automated business logics could be intergrated with the blockchain.  While the potential is there for an entire credit agreement to be coded, particularly if there is sufficient standardization of terms, the probable way forward will be to have a paper contract accompanying a digital one. Smart contract technology – code that self-executes when certain conditions are met – will be able to benefit the borrower consent process, which could be completed on the blockchain; even credit agreement definitions, like “Eligible Assignee” or “Disqualified Institution”, can be automatically executed on the blockchain.  Additionally, because blockchain requires that every network participant is represented by a digital identity, a token representing a party’s approved KYC information and creditworthiness could be stored on the blockchain. If regulators made clear that banks are able to rely on KYC done on the network, this is potentially transformative.  Finally, the presenters noted some of the proactive legislative efforts underway in some states.  Delaware is the pioneer, but Arizona, New Mexico and Vermont are also working on legislation that would specifically recognize digital signatures and the enforceability of smart contracts. The speakers made clear that while blockchain is not happening tomorrow – more like one to five years – movement to implement blockchain technology is happening today.

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