Given the hype and controversy surrounding it, you’d be forgiven for thinking distributed ledger technology (DLT) wasn’t much more than a platform for dubious cryptocurrency activity. However, blockchain, a form of DLT, has the potential to transform the financial industry, as shown this month, when Spain’s BBVA completed the first ever international syndicated loan transaction, using its own blockchain network.
A syndicated loan refers to credit issued jointly by more than one lender. This often happens when the amount a borrower needs is too large to be issued by a single financial institution. The $4.6 trillion syndicated loan market is ripe for innovation. Until now, documents have often been shared via fax, thereby resulting in significant inefficiencies.
The €150 million loan issued by BBVA, France’s BNP Paribas, and Japan’s MUFG, to Spain’s Red Electrica Corporation, relied on BBVA’s proprietary blockchain network. These three banks, along with two legal firms, used this distributed ledger technology from the start of negotiations, right up to the signing of the final contract. Information was timestamped and shared instantly over a secure network, with the final contract assigned a unique identifier on the public Ethereum blockchain, in order to ensure its immutability without compromising the privacy of the parties involved.
BBVA’s participation in this deal isn’t just a one-off. Instead, it is an example of the firm’s commitment to innovation. The bank is eager to find new technological solutions that improve its clients’ experience, automate inefficient processes, and minimise operational risk. For example, last April, the bank issued the first corporate loan, using blockchain technology.
As explained by Ricardo Laiseca, Head of Global Finance at BBVA, when he said, “BBVA is simplifying the processes related to corporate financing, and is betting on the use of new technologies, like blockchain, to digitise loan negotiations and contracting. We work with our corporate clients to be able to provide them with the most innovative financing solutions.”
There’s good reason to believe that syndicated loans won’t be the only area of finance transformed by distributed ledger technology. In fact, a study conducted by Accenture estimates that by 2025, investment banks that use DLT could see their compliance costs drop by as much as 50%. Other financial services that could benefit from the deployment of DLT include clearing and settlement, payments, and trade finance. DLT will make it easier to share authenticated documents with numerous parties, verify client and counterparty identities, and reduce the reliance on manual, error prone processes.
That said, the benefits of DLT may be undermined by the development of different platforms. DLT will only work if the systems designed by each individual bank can also communicate with those platforms utilised by other financial institutions. Thus, banks will need to continue to work in tandem to ensure the benefits of DLT are not diluted by the development of separate platforms.
Interestingly, Spanish banks are increasingly at the forefront of adopting innovative technology for traditional financial services. For example, earlier this year, Banco Santander launched On Pay FX, a payments app. It was the first time an international bank has harnessed the power of blockchain to facilitate online payment transfers.
Distributed ledger technology is more than just buzz. While it won’t change the fundamental way banks do business, it could reduce the costs associated with expensive transactions for the benefit of banks and their clients. Going forward, a close eye should be kept on Spain’s banks at they continue to innovate at a faster pace than many of their European peers.