Yesterday, the Chairman of the Australian Securities and Investments Commission delivered a speech about securitization. This is twice in less than a week that policymakers have turned their attention publicly to the process of packaging credit assets for sale (and diversification) in the trading markets.
The first action occurred last week when the European Union formally finalized finally its new securitization rules in an effort to build a European capital market and provide a vehicle for European banks to shed the non-performing loans burdening their balance sheets. I wrote about it -- and parallel moves to expand access by small companies and start-ups to venture capital funding -- at the Atlantic Council.
So the Australian speech in London on securitization engaged my curiosity. Chairman Medcraft seems also to have been inspired....by a report from the US Chamber of Digital Commerce (via Deloitte) focused on how blockchain can be used within the securitization industry. Much of Chairman Medcraft's speech will be familiar to our readers who understand the decentralized mechanisms by which blockchain components are verified.
The efficiency gains associated with applying blockchain technology to the securitization sector are intuitively compelling. They include faster and more reliable settlement through smart contracts as well as more efficient verification of the underlying assets within the securitization pool and streamlined due-diligence. Deloitte produced the nifty infographic on the left illustrating the various use cases described by Chairman Medcraft.
The more interesting part of Chairman Metcraft's speech occurs at the end, when he highlights the key regulatory policy considerations that will have to be met if and when distributed ledger technologies will be acceptable (at least in Australia) in order to support the evolution of securitization markets.
Four Key Regulatory Issues, One Classic Challenge
The four key regulatory issues were interesting. They focused predominantly on the operational structure of blockchain technology (privacy, but not so much that it interferes with regulatory scrutiny; cybersecurity; digital contract enforceability; agreed data and security standards.
So at its core, the policy debate regarding regulatory engagement with blockchain in the securitization sector is not too different from most other official sector policies regarding technology: policymakers seek first and foremost to safeguard their access to information and systems being used to effect transactions.
This is of course understandable, particularly in the financial arena. Regulators are responsible for ensuring that financial markets and payments systems are reliable. They are also responsible for ensuring that financial transaction mechanisms do not inadvertently become transmitters of systemic instability that causes widespread loss. These responsibilities will weigh particularly heavily on regulators responsible for securitization oversight given the role that securitization played in the most recent financial crisis.
Policy Trend Projection
FinTech companies active in this space need to settle in for a long discussion with policymakers. The hurdle rates are high. Policymakers will require more than just proofs of concept before letting distributed ledger technology to fun free in the capital markets. This will be a multi-year engagement for both sides.
In the near-term, the most likely quick gains will be found if and when blockchain applications for the securitization sector and smart self-executing contracts are permitted to operate within highly supervised sandboxes. Watch this space.
In other words: look to the United Kingdom and Singapore to lead the way since they have highly developed sandbox initiatives and ready access to a broad range of loans suitable for packaging into a securitization instrument. The other major sandboxes (Malaysia, Abu Dhabi, Dubai) will not likely be significant sources for retail securitization use cases due to the relatively low use of traditional loans which form the underlyings in securitization vehicles. These sandboxes instead could become more likely leaders in specialized securitization innovation involving trade receivables and other sharia-compliant instruments.