Blockchain and Securitization

image by  David Stankiewicz

Deloitte prepared a report on behalf of the Structured Finance Industry Group and the Chamber of Digital Commerce, Applying Blockchain in Securitization: Opportunities for Reinvention. It opens,

The global financial system is betting on blockchain to revolutionize many aspects of its business, and we (the Structured Finance Industry Group and the Chamber of Digital Commerce) believe that securitization is one of the areas in the capital markets that could most benefit from this transformation. Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, recently called blockchain “a very important new technology” that “could make a big difference to the way in which transactions are cleared and settled in the global economy.” Financial services institutions have already invested over a billion dollars in the technology, with most big banks likely to have initiated blockchain projects by the end of 2017. There are already hundreds of use cases, ranging from international payments to securities processing, while technology firms including Amazon, Google, and IBM are offering a host of blockchain services aimed at the financial industry.

Why are all of these companies investing in blockchain? This new technology has the potential to dramatically disrupt the role of intermediaries—including that of banks—in financial transactions. Traditional activities performed by intermediaries might be changed or even replaced. Blockchain can also bring significant advances in efficiency, security, and transparency to many of the financial sector’s activities.

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The Structured Finance Industry Group and the Chamber of Digital Commerce commissioned Deloitte & Touche LLP (Deloitte) to explore how blockchain might reinvent securitization—and how the securitization industry should consider preparing for this rapidly approaching future. This industry is exploring this nascent technology’s potential benefits and costs. Firm answers on blockchain’s likely use cases are not yet available, but discussions with securitization and blockchain experts have led to some key observations and insights about implications and possible paths forward. (1, footnotes omitted)

The report’s bottom line is that “[b]lockchain and smart contracts could catapult the securitization industry into a new digital age.” (2) It finds that

The technology’s potential to streamline processes, lower costs, increase the speed of transactions, enhance transparency, and fortify security could impact all participants in the securitization lifecycle—from originators, sponsors/issuers, and servicers to rating agencies, trustees, investors, and even regulators. (2)

The report provides a nice overview of blockchain basics for those who find distributed ledger technology to be mysterious. The real value of the report, however, is that it provides concrete guidance on how blockchain can be integrated in the securitization process. There is a chart on page 24 and an explanation of it on the following page that shows this in detail. This level of detail makes it much easier to visualize how blockchain can and most likely will change the nature of the business in years to come.

Welds on Eminent Domain for Underwater Mortgages

One of the great joys of being a professor is being able to brag about your students’ accomplishments.  Brooklyn Law School just posted this about Leanne Welds on our website:

Leanne Welds ’14 has been awarded the 2014 Brown Award by The Judge John R. Brown Scholarship Foundation for her paper “Giving Local Municipalities the Power to Affect the National Securities Market.” The Brown Award recognizes excellence in legal writing in American law schools. This is the first time a BLS student has taken first place in the national competition, which awards a $10,000 stipend to the winner.

Welds is currently an associate at Simpson Thatcher & Bartlett LLP in its Real Estate Group. As a student, she served as Executive Articles Editor for the Brooklyn Law Review and was the recipient of the Lorraine Power Tharp Scholarship from the New York State Bar Real Property Section. She was a member of the Community Development Clinic taught by Professor David Reiss, and externed with Enterprise Community Partners, an affordable housing firm. She also served as secretary of the Black Law Students Association.

“It is truly gratifying to have my work recognized in this way,” Welds said. “I picked this topic for my Law Review Note because of my combined interests in both the real estate and social justice aspects of the issue, but I never once thought I could be writing an award-winning paper. I am especially thankful to Professor David Reiss for believing in my work and sponsoring me for this competition, as well as both Professor Brian Lee and Professor Reiss for their detailed and thoughtful comments throughout the drafting process.”

Welds’ winning paper evaluates the constitutionality and wisdom of plans by local governments to condemn underwater mortgages without also condemning the land that is attached to the mortgages. These plans are in response to the foreclosure crisis that has hit certain communities particularly hard. If successful, these plans would result in refinanced and smaller mortgages on homes that have seen their values drop dramatically since the start of the financial crisis. The financial industry opposes these plans because they would reduce the face value of the existing mortgages.

“Leanne is a perfect candidate for this prize,” said Professor David Reiss. “Her passion for the law is complemented by an excellent work ethic, good legal judgment, and serious intellectual firepower. Leanne is a rising star of the bar. I have no doubt she will not only be a valuable member of the bar, but that she will also play a leadership role in the community.”