FAQHow will blockchain impact credit ratings?

Blockchain technology will provide a competitive advantage to originators, allowing them to both lower their rating costs and increase their capital efficiency through reduced levels of credit subordination (or achieve higher ratings through comparable subordination). It will achieve this by reducing risk, improving surveillance, protecting investor rights and reducing rating agency expenses.


Determining the credit risk of the collateral backing a securitized asset is among the most important factors in rating the resulting bonds. Blockchain origination will reduce this risk in two ways: through increased certainty in the underlying credit data, and through a streamlined ability to manage recoveries in instances of default. Blockchain can simultaneously allow for a 100% audit of all loan pools, while enabling independent verification of the diligence results. This is achieved by leveraging two key elements core to every blockchain protocol—proofs of authenticity and immutable data—with the efficiency and consistency provided by smart contracts.


Blockchain will also greatly enhance transparency and operational reporting, allowing rating agencies to improve their deal surveillance and investors to react more rapidly to changes in the underlying collateral performance. All transactions in a blockchain system are recorded in real-time to the distributed ledger, the “single source of truth” accessible to all permissioned participants. Borrower payments are recorded to the chain and made visible as they are received, eliminating the 30-day remittance reporting cycle that characterizes today’s environment. Another benefit of the distributed ledger as the universally accepted source of truth is the elimination of reconciliation errors and effort between different databases. It is not uncommon for discrepancies to exist between servicer reporting and investor reporting. With a blockchain-based platform, servicer reporting and investor reporting are driven off the same data. The combination of a single dataset and the extreme granularity of the data stored virtually eliminates reconciliation errors, and make any questions that do arise much easier to resolve.


There exists no central ledger anywhere on earth containing the beneficial owners of stocks and bonds. This situation has existed since market moved to the indirect nominee (aka “Street Name”) legal regime in the 1970s in response to the Paperwork Crisis on Wall Street. Registered ownership was separated from Beneficial Ownership, with DTCC created as the registered owner of all traded stocks and bonds. DTCC holds assets in the name of the nominee (the custodial banks) who in turn hold them on behalf of the true beneficial owner. Blockchain solves the root cause of the bondholder communication problem: it replaces fragmented, inaccessible ledgers with a universal distributed ledger accessible to anyone with the appropriate permissions. By recording every transaction—including ownership transfers—immutably on chain, it reconstitutes the comprehensive ownership registry for a security that was scattered behind the sequestered walls of bank custodians.


Blockchain will also make the rating process faster and more efficient, lowering the cost of a rating and in turn allowing for smaller deals to be economically securitized. There is a direct relationship between analyst effort and the cost of producing a rating for rating agencies, and a substantial component of that effort is spent in structuring and harmonizing the data received from originators and issuers. This is because data is delivered in varying, non-standard formats that need to be manually manipulated (a process referred to as ETL for “Extract, Transform, Load”). Data for many CMBS transactions is delivered in PDFs, for example, requiring analysts to expend significant time in ETL before even starting their analysis. Blockchain ensures that data arrives in a consistently structured, digital format, eliminating the need for ETL. The savings go beyond this, however. Consistently structured data also allows rating agencies to program their own smart contracts to automate credit covenant tests such as geographic concentration, percentage of low FICO borrowers, or percentage of second liens.