So, what is the Blockchain?
A blockchain is a decentralised database that maintains a growing list of data records. So far, we’ve only really seen it applied in the decentralised currency system known as Bitcoin, which utilises a blockchain to store the ledger for all transactions with the currency.
Ratings on Demand
We’re very excited by the prospect of Blockchain technology in business lending. In the world of business financing and small business loans, Blockchain technology can bring about efficiencies that could prevent another financial crisis. You may have heard of Collateralized Debt Obligations or CDO, one of the financial instruments of old that caused widespread panic in global financial markets.
Loans were bundled together, and sold to investors under a AAA rating despite the fact that many were sub-prime. One of the key reasons these loans and CDOs were not flagged earlier as sub-prime was that the loan repayment data behind them was not made available. The delays in being able to detect these toxic loans lead to a widespread financial crisis.
With Blockchain technology at the helm, we could use simple measures derived from the ledger of repayments to determine if a loan was at risk of slippage, CDOs could have their ratings downgraded or upgraded in minutes.
As strange as it sounds, Blockchain technology can help banks talk to each other. Currently, money transfers are cleared by central banks. The synchronisation can take days, taking time and money to produce reports. There is also the risk that money can be lost in the system. By maintaining an internal Blockchain, banks can create a decentralised database for all transactions, so they can always talk to each other. This will make cross-border loans much easier to facilitate, as with the right software, synchronisation can be virtually instantaneous. This could help us provide the best possible business finance to our customers.
In the not too distant future (after the Jetsons, but before Mad Max) we may see contracts take on a whole new form, and we may never look back. Smart Contracts are computer inputs that verify, negotiate and enforce the performance of a contract. This doesn’t mean that you will be able to negotiate your loan terms with a computer program, but your lender might be doing that!
Smart contracts have huge applications for loans. Digital repossessions could mean that a lender could shut down a car electronically if no payments are made (which might not be a good thing). Loan terms could be renegotiated automatically based on circumstances in the business. Embezzlement could be prevented by a smart contract establishing a hierarchy for automated payments. For both the customer and lender, this means less risk across the board.
Instant loan ratings can make loans less risky. A single generalised ledger can help banks communicate better. Smart contracts will make contracts easier to manage. Though the future is unwritten, the future will be stored in a blockchain. In part 2, we'll be looking at how the Blockchain can change the face of Banking and Financial Services.