Collateral Management Solution Using Blockchain

In the last few years, we have witnessed a few biggest frauds in the banking and financial sector worldwide. Either with $639 billion in assets and $619 billion in debt, Lehman’s bankruptcy filing or the $1.8 billion Indian bank loan fraud in recent years was the big eye-opener. Federal Services Royal Commission (Australia) found that the Home Loans were being given based on fraudulent documents and recently, CNBC has reported* Mortgage fraud risk jumped more than 12 per cent year over year which measures six fraud indicators: identity, income, occupancy, property, transaction and undisclosed real estate debt.

All of these fraud cases not only lead to losses to the banks but also increase their operational costs. This seems to be more common for Collateral which is Properties, Factories and Machinery. Banks need to hire agencies to validate the collaterals, agencies to value the collaterals, agencies to validate the titles and so on This has increased the operational cost of banks while adding extra layers of complexity and regulation to the process of lending and borrowing.

The highest number of fraud cases is in the banking and financial services (17.8%), with a median loss of $200,000 (ACFE, 2014). The U.S Federal Bureau of Investigation (FBI) classified banking institution fraud as tier one strategic priority in its investigation planning (U.S. Department of Justice Report, 2001).

What if there could be a system which is tamper proof, can maintain a public history of transactions in real time and once a transaction (financial/nonfinancial) is posted is irreversible?

Enter Blockchain

Built on a distributed ledger, the very nature of its design is trustless and decentralized. This makes it possible to transfer ownership of an asset from one person to another, without the need for an intermediary, an attribute which could help revive peer-to-peer lending practices and even propel it to new heights of popularity.

WHY IS BLOCKCHAIN GAINING IMPORTANCE IN COLLATERAL MANAGEMENT?
Due to regulatory pressures and increasing market competition in financial services, collateral management is getting more importance. According to the regulations – Basel III, Dodd-Frank and EMIR are directing the need for covering exposures with high-value collateral. As per source – banks in Europe had an aggregate shortfall of stable funding of approx US $33.7 billion to comply with the additional liquidity requirements of Basel III.7. As per a study by DTCC for the derivatives market, margin call activity may rise as much as 1000% due to new regulatory reforms for OTC derivatives market and changes in the ISDA’s guidelines for capital requirements. The situation boost to increase the visibility of available and existing collateral. To resolve such challenges, blockchain guarantees that records have not been changed (immutable) and it can operate in a distributed fashion.

How can Blockchain help in Collateral Management?

  1. The immutable “Smart Contracts” of blockchain helps to create an accurate single version of data which provides extreme transparency about collateral
  2. Blockchain consensus model (Security, Real-time value, and fault tolerance) helps to eliminate the need for multiple messages between participants which reduces operational costs for managing collateral
  3. Blockchain increases the visibility of the available collaterals
  4. Blockchain helps to reduce the engagement time of resources spent on collateral settlement
  5. Blockchain can help in eliminating manual errors and associated risks and can help to build confidence in the market

Collateral Management Solution Offered by DreamzTech

DreamzTech has developed a collateral management solution recently using blockchain for a leading bank in the USA to help them in tracking collaterals (such as Loan, CDs, Credit and debit status etc) on Ethereum Blockchain. Using the solution, each collateral would be tracked as a digital asset to track the origination, trail of records and act as a single source of truth of collateral on the blockchain network. Any update on the collateral like pre-payment of the loan amount, an event will be triggered by the collateral system and the smart contract would capture the event and log the transaction on Ethereum blockchain. This would help to manage any constraints on the collateral on the blockchain network to maintain 100% transparency with the customers.

The Key Features of the Solution provided by DreamzTech:

  1. Track Secure Loan: DreamzTech has developed “Smart Contract” using blockchain to interface with the bank’s existing collateral system to track Secure Loan. The “Smart Contract” was developed optimizing minimum gas consumption for each transaction in the blockchain network.
  2. Fetch Collateral Information Securely: Using the platform, the “Smart Contract” fetches the collateral information from the client’s existing system based on Oraclize concept
  3. Track End-to-End Lifecycle: The platform now can trace the end-to-end lifecycle of each collateral with event log of each transaction on blockchain network
  4. Real-time Notification: The platform now able to send an email notification to the loan representative and customer once the loan balance reaches zero
  5. Secure Transaction through Wallet: The platform has created a mechanism for the secure transaction through hardware wallet using the blockchain

How the bank gets benefitted by our blockchain Solution?

  1. Synchronization and reconciliation between blockchain network and banking internal systems helped the bank to increase efficiencies in banking processes and reduce the operational cost
  2. Immutable ledger in the bank’s loan lending process of all loan transactions pertaining to a savings account and CD (Certificate of Deposit) provides Trust and Security

Technology:
Ethereum Network, Solidity, MetaMask, Infura API, Trezor (Hardware Wallet), Remix Editor, NestJS (Express.js), MS SQL Server 2016, Node.js, Web3.js, and other required node modules, Visual Studio Code (IDE)