Blockchain & Distributed Ledgers: Discussion on Emerging Trends in Equipment Finance
At the September ELFA Operations and Technology Conference, there was ample discussion around the evolution of blockchain technology and distributed ledgers, and how these trends may impact the asset finance industry in the upcoming years. There is an expanding point-of-view that blockchain technology has the potential to change the way our industry thinks about asset financing and how financial institutions operate.
What is blockchain?
A blockchain is a type of distributed ledger (digitized, decentralized and shared) that accept inputs from many permissioned parties. The ledger can only be changed when there is a consensus amongst the members (as subscribers and publishers) to amend transactions to the ledger. Recent transactions (“block”) are recorded in chronological order, permanently into the blockchain. Each node (a computer connected to the shared network) gets a replicated copy of the blockchain. This makes blockchains more secure, and alleviates the need for each ‘member’ to record ledger entries manually.
What are potential considerations of a blockchain?
1) A shared / distributed ledger represents a shared system-of-record for recording transactions. This ledger is permissioned and replicated so each party has an identical copy on their “node” (computer).
2) Smart contracts are digitally conducted contracts whose execution (i.e. transfer of ownership) is fully automated by computer protocols. These protocols automatically check legitimacy and will not allow the transaction to be concluded if embedded business rules / terms do not meet established standards.
3) Driving toward data privacy is an ongoing discussion within the execution of blockchains. While several options are being discussed, underlying requirements include privacy, confidentiality, and authentication of transactions between nodes on a blockchain. Will what emerges be subsets of a blockchain where each “node” permissioned in can view everything in that channel, while no others can? How would history be managed with new or leaving members? How would asset transfers or complex netting scenarios work?
4) To maintain trust and auditability, participants must have a verifiable way to endorse transactions, as well as an inoperable / verifiable data audit trail, potentially even extending to regulators.
Potential Future Use Cases for Equipment Finance
IDS continues to track the future of blockchain technology and distributed ledgers and their possible impact on the equipment leasing industry. Current discussions hint that potential use cases (and benefits) could head in some of the following directions:
1) Could the blockchains be leveraged to help digitally manage trusted copies of leasing documents throughout their lifecycle to permissioned parties, spurring greater adoption / integration of digital signature and vaulting technologies?
2) Could smart contracts help automate contractual tasks and obligations, for example the tracking of lease payments or asset conditions / history, and increase the reliability and auditability of contractual information?
3) Could blockchains, through configuring of equipment with sensors, help manage the digital transfer of “usage” keys to a given lessee on a blockchain, changing the usage game and value exchange in managed services and asset utilization?