People must remember that Blockchain is a technology that is a building block for a solution, rather than a turn key solution itself. The technology infrastructure, business services and legal documentation used today to manage Secondary Market Assets is wholly inadequate to migrate to a new Blockchain paradigm. For this industry wide transformation to Blockchain of secondary market processes for managing Assets (from origination, to warehouse lending, whole loan sale and securitization) will require a transition plan to solve each of these problems:
Multiple Disconnected Systems
Each of the Secondary Market participants- from loan originators, loan servicers, asset managers and others- each have their own systems. Few of these systems are integrated so asset data and files must be constantly moved from system to system using ad hoc, labor intensive processes with no audit trails and no reuse of prior investments in asset and data verification.
Documents and Data
Investors and asset managers like to work with data. However, an Asset is comprised of both loan data and loan documents that must be properly stored and managed to be legally enforceable. This document component adds complexity in several ways:
• First, most of the data is locked in documents with no efficient way to validate its accuracy and keep the extracted data linked back to the source documents, resulting in excessive fees from repeatedly validating and auditing data;
• Second, multiple document file types, the lack of standard versions of PDFs, the poor quality of scans and faxes and creation of “PDF Blobs” other document characteristics make it very difficult to easily classify, extract and validate loan data or assembly a complete loan file;
• Third, a loan file must have a complete set of compliant loan documents to be legally enforceable; with electronic loan documents, there are very specific requirements under
• Fourth, while paper/PDF loan files can be kept in filing cabinets or online file shares, “electronic original loans” being originated on marketplace lending platforms and in other asset classes must be stored in systems compliant with the Uniform Electronic Transfer Act (“UETA”) and then transferred among systems in compliance with the Transfer of Location of Electronic Contracts (“TOLC”) to ensure enforceability.
Mosaic of Assets
While all Assets have certain common characteristics (an obligation, a borrower, loan documents, required compliance elements, loan data, etc.) there are many variances (collateral, jurisdiction, loan type, deal type) that have for the most part prevented standardization of data models and businesses processes. This mosaic prevents standardization required for technology to be efficiently applied to scale sufficiently to justify the investment.
Operating Rules Buried in Legal Complexity
The rules for operating a Blockchain enabled Secondary Market Asset transaction are buried inside inches thick legal documents, from Warehouse Lines of Credit, Pooling and Servicing Agreements to Trust Indentures. Reverse engineering the business rules out of these documents and into the computer code will be difficult. How long will it take for attorneys to master this process of embedding self-executing code into these complex documents, and which law firm will issue the required opinion letters about these smart contracts required to close the deal. At $1,000 per billable hour, how big is your legal budget to fund this learning curve.
Current Service Providers Lack Technology Expertise
For compliance, legal and other reasons, Secondary Market Asset pools are typically managed by independent trustees, custodians and agents for the benefit of the Asset owners and lien holders. These service providers lack the technology or culture to design, build and operate an automated system on Blockchain to manage a Smart Contract interacting with Immutable Records of Assets in a distributed ledger.