“Blockchain” is a technological system where data is recorded on a number of decentralised ledgers
(the so-called "distributed ledgers"), which are maintained on the computers that form part of the blockchain, the nodes. Every time that data is to be added to the blockchain, each node is expected to update the copy of the ledger maintained by it by adding the new 'block' to the existing chain. 

A new block is added to the various ledgers only if the blockchain algorithm has positively completed
a secure validation procedure involving all the participating nodes (the ''consensus protocol''), and
once the new block is added, there is no way to delete such entry, for which reason blockchains are
considered immutable. 

Other important features of blockchain  are that any block being added to the ledgers is timestamped
and cryptographed, so that data can be recorded in a secure, and auditable way. 

The blockchain updates are managed by complex and automated algorithm, so that the risk of
human error is minimised and there is no need (necessarily) for intermediaries to manage the
blockchain or carry out reconciliation activities on the recorded data.

Finally, it is important to distinguish between public and private blockchains. Public blockchains  are
also referred to as 'permissionless', as anyone can join the blockchain without obtaining any
permission, by making available a computer (node) that offers computing power helping the
blockchain perform the required calculations (and by so-doing being involved in the consensus
process). Conversely, private blockchains are those where a node can only join the blockchain if
granted with a permission to do so. 

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“Smart Contracts” on blockchains are blocks of code designed to ensure that certain actions are
performed within the blockchain or triggered outside the blockchain, upon the occurrence of pre-
determined conditions as agreed upon between the relevant parties.

In a structured finance context, smart contacts could for instance be those automated processes that
ensure that payments are made on a given payment date, that additional collateral is posted
depending on the quality of the portfolio data made available on reports, etc. 

"Tokenization" or the process whereby a typically illiquid asset held by an issuer could be
converted into a fixed number of liquid tokens (having a fractional value of the original illiquid asset)
to be acquired by investors (who in turn could further subdivide such liquid tokens) has been used by
a number of market participants(for example, Aspen Coin, which tokenises real estate property for
investors).

The main benefit of tokenising assets is that it increases the liquidity of the assets which can then be
traded on a secondary market of the issuer’s choice. Since tokens are highly divisible, investors can
also purchase tokens that represent very small percentages of the underlying assets making investing
much more accessible. Finally, because the transaction of tokens is completed using smart contracts,
certain parts of the exchange process are automated which reduces the administrative burden
involved in trading. With fewer intermediaries, deals can be executed faster and with lower
transaction fees.
 

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There are a number of benefits which blockchain could bring to securitisation:
 

• immutable, traceable audit trail: from loan origination to primary issuance, and
changes in ownership in the secondary market, blockchain can create a chronological and
immutable audit trail of all transactions. With this capability, regulators and auditors can get
a view of the ownership and title of the underlying securitised assets.

 

• speed and certainty: blockchain through its disintermediation and simultaneous
recording of information across the system, can almost totally eliminate time lags in
information and payment flows throughout the securitisation process, including in the
secondary market. This increase in speed and certainty could significantly reduce
counterparty risk, release capital, and reduce the return thresholds that investors require.

 

• security: blockchain’s capacity to increase the security of transactions and data, and
mitigate fraud could be appealing to the securitisation (and indeed generally the financial
services) industry, where integrity of data is paramount, especially if compared to an
industry that is essentially based on exchanges of emails and all security issues relating to
them. One important aspect to consider is that given the interconnectivity of all segments
within the blockchain, wrong entries (because of their erroneous or malicious nature) would
automatically reverberate in several layers of the blockchain and the validation protocols
would prevent such mistake from going unnoticed.

 

• data: information could be presented to all relevant stakeholders for due diligence,
monitoring and execution purposes. In a structured finance context, data recorded on the
ledgers tends to correspond to financial transactions, and for such reason it is more likely
that blockchain securitisations will be "private" blockchains; however, they may be designed
so as to have different permissioned rights so that depending on the type of user (and its role
within the securitisation) different levels of disclosure may be applied (e.g. a security trustee

required to notify the underlying borrowers may need to have access to personal data, rating
agencies may need to have access on reports as well as certain information (e.g. around swap
pricing) which may not be disclosable to all transaction parties). Better and more frequent
data could also create more business opportunities - for example, making granular
information available on a daily basis could help arrangers cut the securitisation pool in a
more precise way and eventually result in better pricing in the interest of all parties.
The above benefits could in turn lead to greater efficiency, speed, transparency and safety on the
securitisation market, which could lead to a higher investor appetite and improve pricing, volume
and spreads, which could lead to more issuers and borrowers using securitisation as a funding
means.