May 2, 2018 - LSTA’s Bridget Marsh and Tess Virmani were joined by Joe Dewey of Holland & Knight and Joshua Ashley Klayman of Morrison & Foerster when they presented on “Blockchain Technology Disrupting the Loan Market” at the World Bank in Washington DC. All blockchains have certain traits in common; they are distributed in nature and have a mechanism for reaching consensus. Without one authoritative copy of a critical ledger maintained on a centralized database by a trusted third party, blockchains are maintained in a decentralised manner and the ledgers are replicated across computers (referred to as nodes) all connected to a common network. Given privacy concerns and KYC/AML policy considerations, closed and permissioned ledgers definitely seem to be the favored approach in financial services. Although focus in the loan market has been on how blockchain technology and smart contracts could speed up trade settlement times, many other areas of the loan market could also potentially benefit. For example, the periodic testing of a credit agreement’s financial covenants could be done far more efficiently if they were expressed in code, which would be possible if the financial data could be taken from a borrower’s financial reports and passed to a smart contract which then uses an agreed formula (previously coded in the smart contract) to determine automatically whether each covenant is met. The unique features of this emerging technology could also help regulators, for they could quite easily monitor transactions taking place on the blockchain. Although the technology is evolving and will likely look very different in five years, it is here, and the general consensus is that it will disrupt how the loan market currently functions.
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