Blockchain technology has transformed the entire landscape of financial transactions. Despite being riddled with controversies over its decentralized and autonomous format, blockchain is here to stay. In a span of just a decade, it has found immeasurable uses in various spheres.
One of the areas that blockchain provides great benefit is in securitization of real assets. Ethereum and various other alt coin tokens help in converting real assets into digital token on the blockchain. This is a tremendous breakthrough in securitization as moving real time assets without disturbing the basic characteristics of the assets opens up endless possibilities.
The need for blockchain securitization of real assets
The various different assets of illiquid type found in the financial market such as oil, real estate, lithium, Co2 emission credits, stocks etc. are difficult to transfer between participants or to subdivide. Thus investors choose trading papers to represent the assets. This method has several drawbacks such as prolonged time for tracking, auditing and exchanging legal agreements and papers.
Thus the process has substantial operational risk. Block chain with its seamless traceability and transparency offers the ideal solution for eliminating the potential risks connected with real asset ownership transfer. Ethereum smart contracts, an important technology for enabling block chain applications is apt for securitization of real assets.
Blockchain smart contracts promise
Securitization life cycle stands to benefit a great deal with the introduction of block chain technology and smart contracts. Block chain technology has several advantages such as
• Streamlines processes
• Lowers costs
• Faster transactions
• Boosts transparency
• Improves security
The above advantages can impact each and every aspect of securitization lifecycle including trustees, regulators, investors, sponsors, originators and rating agency servicers.
Thus blockchain has the power to reduce risks in securitization markets. This potential will attract more investors resulting in improved volume, spreads and prices. With the block chain technology enabling transparency in access to information, it is easy to ensure regulatory compliance. Inherent risks in the market will be reduced markedly.
Making transactions faster and more secure
While conventional systems take several days for clearance and final payment settlement, particularly when done outside working hours, it is not so with blockchain. Transaction time is reduced to minutes and processing is done 24/7. Further its capability of high quality data that is accurate, consistent, complete, and widely available makes it easy for traders. Market participants are united by one central platform where information sharing is very simple.
Since changes in block chains are transparent and viewable by all concerned parties, any changes leave behind an indelible audit trail. This enables a robust security structure. With just a single true information source available to all participants, it is easier to arrive at forecast and analysis that have better predictability.
Meeting the challenges in securitization
Since securitization presents a crucial asset for the financial sector as well as the economy, changes in its structure especially in the technology that supports the main infrastructure and security should be done with caution.
Some of the risks that should not be ignored when contemplating blockchain include
Privacy and data security
Although blockchain is a decentralized network without any failure points and is capable of withstanding malicious attacks, it is still vulnerable. The various cryptocurrency hacks in recent years such as Mt. Gox are standing proof. The huge amounts of information the platform can hold make it a big lure for hackers. If a cyber-attack is successful, the resulting destruction could be unimaginable.
Another issue with blockchain is its privacy structure. Since the distributed ledger system of block chain stores and shares sensitive information on several nodes there is high risk of privacy breach.
Being a new technology, blockchain has not reached the level of completely strong reliability although many of the technological applications have shown good track record. Several smart contracts as well as other block chain applications however are yet to prove their longevity and reliability.
Not regulated completely
Blockchain technology has not yet been regulated completely. Many of the global regulators are yet to accept the application in securitization. This includes verifying, entering and securing data. Newer and more effective monitoring of the platform is needed if its full potential is to be tapped. It is also important for regulations to be in place for integrating block chain in the regulatory reporting.
Despite the inherent risks, securitization of real assets with block chain would result in high cost reduction as the process is highly automated without the need for intermediaries. There is little or no human intervention in the various processes involved in securitization including arranging loans, buying securities and more. With complete and accurate data record that is traceable and transparent, there will be a rise in trading volume, fall in spreads and improved prices. With stable securitization supply will increase lowering credit cost. The elimination of fraud and poor documentation with the immutable data feature would further help the industry gear up for any type of eventualities.