The use of blockchain technology in certain complex financial markets could create a risk of systemic crisis, according to Moody’s.
In a new report, the rating agency highlights the growing attraction of blockchain technology — the software that underpins cryptocurrencies such as bitcoin — to banks and others involved in so-called securitisations, or the conversion of debts and other financial assets into easily tradeable forms.
Blockchain technology, which creates electronic ledgers of transactions that can be shared easily among all parties to a trade, can make securitised trades more efficient and lucrative, Moody’s said. However, senior analyst Frank Cerveny stressed its use in securitisation is still “in a very early stage”.
However, its widespread adoption would also introduce new risks, the agency warned.
The report’s authors write: “New key transaction parties will be introduced to the process, namely the entities that serve as developer, provider and operator of a blockchain.
“They may be either closely linked or identical with the originator, or independent third-party service providers, which could lead to a certain degree of counterparty concentration risk.”
The authors go on to state that concentration risk “may also assume a systemic component”, if multiple securitisations come to rely on the same blockchain provider.
There have been very few examples of blockchain-enabled securitisations to date. Moody’s has, however, worked on one such deal.
In February 2019, private equity group Weinberg Capital used blockchain technology to support an asset-backed commercial paper transaction. Moody’s determined that the use of the technology would not result in a downgrading or removal of the rating it had already assigned to the notes.
The idea of systemic risk stemming from blockchain adoption is not new.
The European Banking Authority, a regulatory body, published a report in July 2018 that highlighted the potential for concentration risk arising from multiple institutions relying on the same blockchain provider, “leading to macroprudential concerns, i.e. a possible single point of failure”.
The crux of the issue is the idea that a blockchain, to use Cerveny’s words, is not a system that can run “in autopilot mode” — despite the technology’s ideological origins in the desire for a currency free of the control of a central monetary authority.
“Someone has to define the rules and also has to monitor the application of the rules,” Cerveny said.
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