BLOCKCHAIN FOR SECURED LENDERS: CRASH COURSE

May 28, 2020

A revolution in secured lending is underway, but it’s still in its early stages. The revolution is blockchain technology. The potential is massive, but at the moment it’s still in dial-up phase — think of the internet in 1992.

Blockchain technology, the ledger system that makes Bitcoin possible, turns records into time-stamped blocks and doesn’t rely on banks or any central parties to verify transactions. Blockchain’s ledger is decentralized, distributed to all participants in the network who verify transactions by consensus.

Soon after it was made public in 2009, Blockchain began capturing the imagination of the financial services industry — ironic because the technology itself was designed to remove them (middlemen) from the equation.

Specifically, there was considerable appeal in having all parties to a transaction work from a consensus-driven ledger that no one party controlled. Settlement times would drop from days to seconds. All parties would have the same view of the data, leading to more transparency and efficiency. Parties could leave and join a transaction at will without tampering with the data. Six in ten large financial services firms now plan to employ blockchain or are seriously considering it, according to Juniper Research.

Challenges Blockchain Could Solve for Secured Lenders

-The need to document a security interest in collateral
-Any and all changes to collateral, like shipment of a product or the payment of an invoice, must be recorded as soon as possible.
-Fraud must be avoided, and at least detected very quickly
-There is a widespread need for greater efficiency

Blockchain technology, in one way or another, could go a long way in ameliorating, or outright solving, every one of these concerns. For instance, Blockchain could be used to document inventory collateral. The lender’s security interest would be tracked along with the asset no matter the asset’s status, whether it is moved from one place to the next or whether it is sold to another entity.

Challenged Blockchain Could Solve for Factors

In the factoring industry, Blockchain could be used to seamlessly record invoices and and document subsequent actions related to those invoices. Blockchain could also eliminate the need for a factor to match payments to invoices because the payer could easily link their payment directly to the invoice over the Blockchain. The transaction itself becomes the receipt. Fraud becomes much more difficult to achieve, and accounting becomes much more difficult to screw up — a good thing for companies in any industry, but especially financial services.

Is Blockchain Right You?

This is a complicated question to ask, but here is a  question to get you started:

What could my company and all the other companies we interact with accomplish if we had access to a single, shared, secure ledger?

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