Blockchain and lending: from syndicated loans to mortgages
Blockchain’s reliable digital record keeping is starting to streamline lending, cutting down or even doing away completely with the complicated paper trail that has traditionally been part of borrowing money.
Disrupters are hoping to change the way the whole process is carried out, while established businesses are exploring ways that the technology can make the lending process quicker and cheaper.
Schuldscheine, once niche German products but now increasingly common in other countries, have been leading the way. Schuldscheine are a sort of half-way house between a loan and a bond and their relatively simple contracts are a good fit for blockchain technology.
Daimler borrowed €100m in 2017 via a Schuldschein in a deal led by Landesbank Baden-Württemberg (LBBW) with several other German banks in on the contract.
“The entire transaction — from the origination, distribution, allocation and execution of the Schuldschein loan agreement to the confirmation of repayment and of interest payments — was digitally carried out via blockchain technology,” Daimler said.
Syndicated loans, where a number of lenders group together to provide finance for a single borrower, are likely to follow the lead of Schuldscheine. Spanish bank BBVA is currently testing the use of blockchain for syndicated loans.
BBVA, too, is an early adopter of blockchain technology. In April it lent Spanish IT technology and consultancy company Indra €75m. It was the first example of a corporate loan that used blockchain all the way through the process.
BBVA’s global head of customer solutions, Derek White, said at the time: “This is a prime example of where disruptive technology can add real value to business processes. The use of blockchain in this transaction has greatly increased transparency and speed, while equally improving efficiency – it’s a win-win for both us and Indra.”
The deal was negotiated on an internal solution built on a private blockchain through Hyperledger, of which BBVA is a member, and once the deal was agreed its hash code was registered on Ethereum’s public blockchain.
Another development for the syndicated loan market appeared in April when Finastra’s Fusion LenderComm launched as an app on R3’s Corda platform. The app streamlines the exchange of information between agent banks and lenders and so cuts costs and speeds up the whole process.
Traditional mortgage providers are cutting costs by using blockchain for their records. For instance, Bank of China Hong Kong processes the majority of its mortgage-related real estate valuations with the help of its own digital ledger.
And Bank of Scotland is working with the UK’s Financial Conduct Authority (FCA) and technology firm R3 to develop a blockchain-based application to improve regulatory reporting of mortgage transactions.
While traditional mortgages have yet to move completely onto the blockchain, new entrants to the market are looking to manage the whole process on it.
Homelend aims to disrupt the market with its blockchain-based peer-to-peer mortgage lending platform. It is looking to raise $30m through sale of its Ethereum-based tokens. Pre-sale of the tokens started in March but, as yet, there is no date set for the crowdsale.
Homelend’s white paper says its platform works by “embedding mortgage lending business logic into smart contracts”.
Another potential disrupter to the mortgage market is Block66, which is also in the early stages of trying to raise funding. It says it is “on a mission to shake up the mortgage lending landscape by building the world’s first blockchain enabled mortgage lending network”.
And Viva Network plans to offer a borderless mortgage products platform, allowing investors to crowdfund mortgages across international borders.
Blockchain loans are offered by a number of companies. The Secure Automated Lending Technology (SALT) platform lets people use their cryptocurrency assets as collateral for loans. It is currently the biggest player in blockchain lending. Interest rates on the loans are high but borrowers get their tokens back at the end if they don’t default on the deal.
ETHLend, not surprisingly given the name, is built on top of the Ethereum blockchain. It acts as facilitator for peer-to-peer lending agreements. Borrowers and lenders can set their own rates and length of loans. An Ethereum wallet address is necessary to send or receive money and any ERC20 tokens are acceptable as collateral.
Ripio Credit Network is aimed at the Latin American market and is based on smart contracts. Participants do not have to own any cryptocurrency. All credit transactions are in local currency but RCN tokens are needed to access the network and for transactions among agents.
It is not totally peer-to-peer though as intermediaries, known as cosigners, are put in place by the platform to help chase up defaulters.
While blockchain is an exciting new addition to the landscape, changing existing systems will take time, money and the inclination to do so. Will the banks and providers be prepared to spend money now to save money in the long run or will they hesitate and let new entrants chip away at their market share?