State Street, 14th largest bank in U.S, is looking to alter the model of security lending by adhering blockchain technology. The Bank is looking forward to introduce a peer-to-peer version of securities lending to eradicate the middleman, broker, in the operation and allowing client to directly deal with the borrower.
Market all over the world is looking up to this model of peer-to-peer security lending. According to Nick Delikaris, head of global trading and algorithmic strategies, “this transition is not easy to achieve and definitely it can’t be done overnight”.
He thinks that although market is in need for a switch to this kind of model but many companies face trouble in coping up with the latest technology which is thwarting the transition. He still regards this phase as positively optimistic because no matter whatever model is adopted by companies at the end of the day, this phase will for sure lead to many improvements which will be a plus point that ultimately matters. He shared his stance and understanding regarding the adoption of model by companies and problems in process of transition. He said:
It’s not an on-off button, like you can wake tomorrow and be doing everything peer-to-peer…….Different counterparties will have different flavors, and to start with some of this tech may actually make things harder…… I think that’s what we are going through right this second. But at the end of the day, we will have a better industry set up.
Similarly, Doug Brown, head of alternative financing solutions at State Street, admires the peer-to-peer lending of securities as well. He admits the prospect in blockchain to fulfill the needs of the model and make it a reality but again he too doesn’t ignore the fact that many companies aren’t well equipped to invest their resources for it. According to him, there are several factors affecting the decision of companies to spend time and efforts on this new, potential model of lending securities. Quite evident from his statements, he doubts implementation of peer-to-peer due to these reasons.He said:
If you look at that marketplace and the people who borrow securities, there are very few institutions that have the technology or the operational infrastructure in place to do that themselves today…. there is a real question about whether it’s worth their time to build that infrastructure, the cost to do it, the staffing to do it – or whether the model they are using today is efficient enough.
According to Brown, peer-to-peer model will make borrowing securities much economical than it is now, thus leaving more margins for the lenders. At the same time he acknowledged some of the benefits that brokers brought. With their absence, parties would be crediting a lot due lack of trust. Besides this, absence of borrower indemnification will be putting the lender at a disadvantage. In cases where borrower fails to return borrowed assets in a peer-to-peer model, the damage or loss would be subjected entirely to lender. Therefore not letting reality and practicality off the hands, he mentioned some of the drawbacks of implementing this model. He said:
A P2P model, where everybody faces each other and negotiates contracts, where the protection is gone and both parties now need credit teams, would likely not be a broad industry solution….That model might work for a small subset of institutions. But if you only had a small number of institutions participating I think it might be challenging to convince people there was enough liquidity to really move that market in a large way.
Meanwhile, many other banks of the world are beyond the debate of usig blockchain or not. They have utilized blockchain for securities lending. ING and Credit Suisse have sent almost $30 million worth securities using blockchain application. Herve Francois, blockchain initiative lead at ING, regarded the technology as evolution and a way to eliminate the intermediaries. He said:
That could be a way for those actors to still play a role in the short- to medium-term….It’s a step in the blockchain evolution which in the long run should be able to dis-intermediate them.
Blockchain technology has been prevailing in today’s world in almost every field. State Street has been proposing its use for security lending solutions that are already employed by some other banks. While it is not confirmed that State Street will be using blockchain particularly for security lending, it is evident from their tech head’s statement that blockchain will remain an important area of focus and attention. He said:
One of my three largest investments in technology is around blockchain.