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Smart Contracts and Blockchain: Separating Hype from Reality
This document summarizes a presentation on smart contracts and blockchain. It discusses how blockchain could improve transparency and automation in loan securitization processes. It then demonstrates a sample application of blockchain for issuing bank guarantees more efficiently through automatic approval of standard terms and online applications. The presentation discusses how blockchain platforms abstract away complex technical details and enable modular preconfigured networks and integration with cloud services.
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Smart Contracts and Blockchain: Separating Hype from Reality
- 1. © 2018 ApttusCorporation #AccelerateMO Cory Haynes, Apttus Michael Glaros Cliff Goodwin Smart Contracts and Blockchain: Separating Hype from Reality
- 2. © 2018 ApttusCorporation Safe Harbor Statement
- 3. © 2018 ApttusCorporation CORY HAYNES HEAD OF GLOBAL FINANCIAL SERVICES APTTUS CLIFF GOODWIN SENIOR SALES ENGINEER APTTUS MICHAEL GLAROS SENIOR PROGRAM MANAGER AZURE BLOCKCHAIN MICROSOFT
- 4. © 2018 ApttusCorporation HEAD OF GLOBAL INDUSTRIES, FINANCIAL SERVICES Cory Haynes The secret of change is to focus all your energy on not fighting the old, but on building the new -Socrates @corylhaynes • 17 years in Banking, Wealth and Asset Management • FINRA License: Series 7, 24, 33, 66 • Cal Bear • Avid Swimmer and Tough Mudder Competitor
- 5. © 2018 ApttusCorporation Intelligent Middle Office for Financial Services RetirementLife & PC Banking Software Research Risk Mgmt. & Analysis Capital Markets Brokerage Wealth & Asset Banking Mortgage and Loan Cards and Payments Wealth & Asset Management FinTechBanking & PaymentsInsurance & Retirement Services Reinsurance/ Finance AI / Blockchain Apttusempowers 80+ FinServ Customers across strategicsegments
- 6. © 2018 ApttusCorporation Party Like It’s 2008
- 7. © 2018 ApttusCorporation Flashback: 2008 Global Financial Crisis
- 8. © 2018 ApttusCorporation Traditional Loan Securitization Process
- 9. © 2018 ApttusCorporation Transparency, Immutability, Auto-Execution 1. Loan info and title transparent and immutable 2. Loan serving performance 3. SPV special instructions smart contract 4. Security serving smart contract 5. Rating monitoring software immutable 6. Market makers have real time information on performance 7. Security information available to investors
- 10. © 2018 ApttusCorporation DEMO Cliff Goodwin
- 11. © 2018 ApttusCorporation Senior Program Manager Azure Blockchain Michael Glaros
- 13. Manually deploy ledger Write business logic Orchestrate signing, hashing androuting Store smart contract reference data Synchronize data with off- chain DB Ingest messages and events Build web client API management Manage keys Customize integrations Extend capabilities Integrate with existing business apps Configure consortium network Link to federated identity systems
- 14.
- 15. creating modular preconfigured templatesand infrastructure Ledger and topology choice Choose the ledger that meets your needs Deploy on flexible topologies (dev test, multi-node, or multi- member) so you can expand when you’re ready
- 16. Horizontal SaaS &adapters Data Platform (ML/BI) Off-Chain Storage Monitoring & Security 3rd Party Services Enterprise Integration Identity & Key Managemen t Client apps & devices Enterprise ledger Workflow execution Identity & key management Ledger-neutral approach Auto-generate starter apps Integration APIs & events Workflow/user admin Azure data integration Azure Blockchain Workbench
- 17. Consuming Apps, Services & Systems Application InsightsAzureKey Vault Virtual NetworkingAzure AD Data Sources Apps Sensor Data API Service Bus DLT Services (API, Hashing, Signing) Blockchain Ledger Off-Chain DB Off-Chain Storage Azure Functions Reference Data Power BI APIs Logic Apps Event Grid
- 18. Blockchain in Action| Remote bank guarantee issuance Beneficiary A healthcare organization wants to build a hospital, and seeks a bank guarantee to verify solvency of construction firms Draft of guarantee Beneficiary submits draft to bank with desired terms and conditions Review and negotiation Bank’s legal team and beneficiary collaborate on non-standard language Online application Bank publishes finalized guarantee as an easily accessible online application Bank approval Construction firm meets requirements and is granted a bank guarantee Automatic approval Standard language is pre-approved by bank Customer Construction firm applies for bank guarantee online SHARED LEDGER Bank review • Customer requirements: Standard – approved • Bank requirements: Non-standard – revised to $40M Final text of guarantee • Customer requirements established • Bank requirements established Customer application • Contractor license #: L76GN4229 • Collateral available: $5 million Draft of guarantee terms and conditions • Customer requirements: • Provide valid license • Provide $5 million in collateral • Bank requirements: guarantee $50M Bank guarantee • Bank: signed • Beneficiary: signed • Customer: signed
- 19. © 2018 ApttusCorporation© 2018 Apttus Corporation Thank You MICHAEL GLAROS MICROSOFT CLIFF GOODWIN APTTUS CORY HAYNES APTTUS
Editor's Notes
- #6 Apttus has provides an Intelligent Middle Office solution to optimize business processes for across four key financial services segments. We are deeply penetrated in industry with more than 70- customers across four key segments and understand it well Insurance and Retirement Services -- Our customers include companies in life and property and casualty space, retirement services and reinsurance. Some of the examples are Guardian, The Standard, CUNA Mutual. Wealth and Asset Management – We work with Capital Market firms, wealth and asset management firms and brokerages. Some of the marquee clients are Deutsche bank and Oppenheimer Funds Commercial banking – in the banking space we have mortgage and loan providers such as Fannie Mae and B2R Finance, in the banking space we have Capital One and Scotia Bank FinTech and Payments – In the Fintech and Payments space we work with FIS and Q2ebanking which provide banking software, Dun and Bradstreet to help them sell research and data services. We are also working with Microsoft in the Smart contacts and Blockchain and AI Across the four segments we help clients get products (example a new fund, an OTC derivative, equity research, new loans and cards) to market faster, manage all the paperwork (offers, proposals and contracts) generated, amended, approved by all parties and signed
- #8 https://www.thebalance.com/what-caused-2008-global-financial-crisis-3306176 4 Horsemen 1. Deregulation In 1999, the Gramm-Leach-Bliley Act repealed the Glass-Steagall Act of 1933. The repeal allowed banks to use deposits to invest in derivatives. Bank lobbyists said they needed this change to compete with foreign firms. They promised to only invest in low-risk securities to protect their customers. 2. Securitization How did securitization work? First, hedge funds and others sold mortgage-backed securities, collateralized debt obligations, and other derivatives. A mortgage-backed security is a financial product whose price is based on the value of the mortgages that are used for collateral. Once you get a mortgage from a bank, it sells it to a hedge fund on the secondary market. The hedge fund then bundles your mortgage with a lot of other similar mortgages. They used computer models to figure out what the bundle is worth based on several factors. 3. The Growth of Subprime Mortgages In 1989, the Financial Institutions Reform Recovery and Enforcement Act increased enforcement of the Community Reinvestment Act. This Act sought to eliminate bank “redlining” of poor neighborhoods. That practice had contributed to the growth of ghettos in the 1970s. Regulators now publicly ranked banks as to how well they “greenlined” neighborhoods. Fannie Mae and Freddie Mac reassured banks that they would securitize these subprime loans. That was the “pull” factor complementing the “push” factor of the CRA. 4. The Fed Raised Rates on Subprime Borrowers Banks hit hard by the 2001 recession, welcomed the new derivative products. In December 2001, Federal Reserve Chairman Alan Greenspan lowered the fed funds rate to 1.75 percent. The Fed lowered it again in November 2002 to 1.24 percent. That also lowered interest rates on adjustable-rate mortgages. The payments were cheaper because their interest rates were based on short-term Treasury bill yields, which are based on the fed funds rate. But that lowered banks' incomes, which are based on loan interest rates. Many homeowners who couldn't afford conventional mortgages were delighted to be approved for these interest-only loans. As a result, the percent of subprime mortgages doubled, from 10 percent to 20 percent, of all mortgages between 2001 and 2006. By 2007, it had grown into a $1.3 trillion industry. The creation of mortgage-backed securities and the secondary market ended the 2001 recession. (Source: It also created an asset bubble in real estate in 2005. The demand for mortgages drove up demand for housing, which homebuilders tried to meet. With such cheap loans, many people bought homes as investments to sell as prices kept rising.
- #9 Why Blockchains? Note: In the case of financial asset backed securities: Distributed Ledgers should be used. Blockchains are a way to introduce transparency into supply chains and create entirely new opportunities for participation. This shared, secure record between parties would break supply chain data out of its silos. Imagine a ledger which included all the parties involved in the subprime mortgage crisis being a part of: Investors, underwriters, asset managers, trustee and collateral administrators, accountants, attorneys and regulators. All parties would be able to see what made up each and every tranche and each every MBS and CDO. Who bought it and sold and to whom along the supply chain. Each party could get a real time view into their risk profile and adjust it accordingly. This includes counterparty risk, credit risk, default risk and ownership risk. By having all participants on the ledger a real time rating system is established as opposed to the way it is done today in which it lags behind and is semi-static. By having all the participants on the ledger and allowing real-time read/write functionality, risk will fall significantly and compliance standards will rise dramatically (tragedy of the commons). Smart contracts built on the ledgers will self validate the authenticity of identity, the mortgage agreement itself, the chain of custody of the titles and automate payments of interest and principal between parties. By having a real-time view of payments, imagine the possibilities. These records and registrations are created in a distributed way (by having all parties on the ledger) which creates new ways to track identity and the reputation of all involved. This creates real time ratings for the assets involved and the counterparties on the ledger. Blockchains can create a formal registry to identify each individual mortgage or slice of a mortgage (or any asset) and track chain of title through different exchange points in the supply chain. (Goodbye MERS) When blockchains track the movements of assets from beginning to end and all points of exchange in between they can also see how these assets become repackaged and continue real time tracking. This allows all users to know what exactly went into the creation of the asset and how it has changed along the way. How powerful is this for custodianship and prosecuting bad actors. Better yet, stopping them from acting bad in the first place. Imagine if regulators could have tracked back all the MBSs and CDOs as well as who owned the mortgages and who the counterparties were. This would have made enforcement actions much easier to attain. It would have made reckless behavior from all parties much more difficult and it would have precluded many investors from buying these assets to begin with. There would have been transparency into asset structuring and asset pricing. In the aftermath, companies were forced to merge (Wachovia, Washington Mutual, Countrywide, US Bank etc) with the bigger banks in super quick fashion without having any view into the risks they were inheriting. They did not even know where the data was stored and in what form. Forensic experts were brought in to try and peel through the layers of the onion and uncover many different information points, ascertain ownership, find out who the counterparties were and unwind businesses. It was extremely disorderly and is still being done. If anything this should be a statement to the fragility of the financial system and the technologies in place at present. Complex systems like the financial system need robust solutions. Blockchain is a robust technological system which has many answers for dealing with the use case presented. In the future financial calamities may not be able to be stopped but they can be tempered.
- #10 How can blockchain and smart contracts benefit securitization? We will explore in detail how potential benefits could play out at the different stages of the securitization lifecycle, but for now, here are some common themes to keep in mind: One version of the truth. Blockchain enables a single, consistent source of information for all participants in the network. In an industry that currently faces inefficiencies around the storage, reconciliation, transfer, and transparency of data across multiple independent entities, this feature could be highly beneficial. A complete, immutable, and traceable audit trail. From loan origination to primary issuance, servicing, and changes in ownership in the secondary market, blockchain can create a chronological and immutable audit trail of all transactions. With this capability, regulators and auditors could finally get a systemic view of the ownership of the underlying securitized assets. An issue that troubled the industry during the global financial crisis—determining who owned the title to some underlying assets—could be more easily resolved. Better valuation and price discovery. The transparency facilitated by blockchain could reduce the information asymmetry and network disadvantages that some entities, especially smaller ones, currently face in the securitization industry. The resulting market efficiency could raise the investment appeal of securitized assets and deepen the potential pool of investors. Speed and certainty. Blockchain, through its disintermediation and simultaneous recording of information across the system, can virtually eliminate time lags in information and payment flows throughout the securitization process, including in the secondary market. This increase in speed and certainty could significantly reduce counterparty risk, release capital, and reduce the return thresholds that investors demand. Security. Blockchain’s capacity to increase the security of transactions and data, and mitigate fraud could be appealing to the securitization industry, where integrity of data is paramount. Blockchain’s immutable audit trail, for example, could permit every asset (and every transaction involving that asset) to be linked to a particular security, facilitating asset perfection and eliminating the risk of double-pledging assets. The combined impact of all the above advantages—greater efficiency, speed, transparency, and safety for data and transactions—could lower risks in the securitization market as a whole and lead to greater investor interest. This in turn could improve prices, volume, and spreads. With better and more transparent information, regulatory compliance could also be simplified and market failures could become less likely. With these general points in mind, we will now take a more detailed look at the specific places where blockchain could impact the securitization process, ranging from loan origination and loan servicing through the structuring, review, and initial sale of the security, to the servicing of the security, ongoing ratings monitoring, and secondary market trading. At each stage, we will look at some inefficiencies in the current process, then explore how blockchain is likely to change how the industry handles certain questions around its core functions and obligations, including data recording and dissemination, transaction execution, receiving and making payments, and regulatory compliance. We will also look at why, despite the likely advantages, implementing a blockchain in the securitization industry may be challenging. We will conclude with a vision of a possible future state and with ideas about possible next steps.
- #14 Note: This slide is animated. It does NOT require a click through. Building an end-to-end blockchain app is a huge undertaking Developers really want to spend their time writing business logic to develop smart contracts, but there are dozens of other steps surrounding this From manually deploying a ledger, to managing pre-processing and storage, to building integrations, to creating a web client, and more, developers get buried in the task of creating an infrastructure and can’t spend their time where it counts <click>
- #15 Note: This slide is animated. It does NOT require a click through. So we’re creating a platform that will tackle those challenges: We started by populating preconfigured networks so that ledgers are easily available on the Marketplace Next, we enabled prebuilt connections to make those ledgers work with existing apps and infrastructure Finally, we created a simple interface so it’s easy to get started <click>
- #16 Let’s start with the preconfigured templates and infrastructure The first step we took was to make sure that ledgers are accessible for developers on the Marketplace, so that it’s easy to get started We’re committed to being ledger-agnostic: our goal is to make sure you can access the tools you need, whether it’s Ethereum, Corda, Hyperledger, or more And we made sure that developers could deploy on flexible topologies, so that they could start out small and expand as needed <click>
- #17 The next challenge we tackled was creating the integrations that developers needed to make blockchain work with their existing IT resources – because no ledger is useful on an island. <click>
- #18 We’ve designed Workbench to work like a kind of ingestion hub like an event hub or a service bus, that's able to be the entry point of information coming into the system And the way we have it set up is the information comes into the ingestion hub and we have it syncing with the blockchain. So writing out transactions into the blockchain and then syncing that data back out to an off-chain data stores locations, so syncing your information to like a SQL database for example. And then at the same time being able to leverage integration points with other types of inputs, like IoT for example, with blockchain. So you have your sensor information coming in and participating in sort of your workflow and your blockchain network as well. And then once everything is into an off-chain storage location, you can imagine being able to easily pull that information out and start creating interesting analytics and machine learning based on the information that's being pushed into the system. <click>