The technology may be in its infancy, but the gradual development and adoption of distributed ledger (blockchain) technology is likely to improve efficiency in the securitization market, says Moody’s Investor Service.
In a new report, the rating agency said the application of blockchain technology in securitizations is still at an early stage, but it expects it to improve the operational efficiency and security of these sorts of transactions.
“Amid the new technology, stakeholders could have easy access to all details of a securitization transaction,” Moody’s said. “Data placed on the blockchain becomes immutable and time-stamped, creating a reliable audit trail. It reduces the risk of fraudulent activities and lessens the need for redundant reconciliation efforts.”
The impact of these gains will include simplifying and accelerating issuance and settlement, Moody’s said, “requiring the participation of fewer parties, ultimately reducing transaction fees.”
Alongside the potential gains to be had by adopting blockchain, Moody’s also highlighted a number of risks, including cybersecurity risks, new legal risks and concentration risks that will likely accompany the technology’s implementation.
“The situation also adds additional complexity and new challenges to risk management and analysis of future blockchain based deals,” it said.
In the short term, Moody’s said the adoption of blockchain technology in securitization will likely be gradual, and limited to certain aspects of the securitization process.
“Applications, in the near-term, will remain experimental, limited to pilot phases with a small number of participants and/or parallel processing with conventional technologies,” it said.