i3 - November/December 2018 - 18

THE BENEFITS
OF BLOCKCHAIN
1.
Reduces
Inefficiency

2.
Increases
Transparency

3.
Overcomes
Misaligned
Incentives

example, encoding
all necessary paperwork and approvals
in the blockchain
before a container
leaves its port of origin. Normally, the
alternative is waiting weeks or months for contracts to be executed and payments to be made to
the various parties involved in a shipment.
Further, using the power of smart contracts
- code that is embedded in the blockchain and
executed when certain conditions are met - a
payment to a port could be triggered automatically once cargo is inspected and approvals get
obtained, allowing a ship to easily set sail for
its next waypoint.
The mortgage underwriting process can also
benefit from blockchain. Now, each party requiring information requests copies of relevant documents individually using delivery methods as
diverse as electronic upload, email, fax, courier
and carrier pigeon. A blockchain that can encode
frequently requested documents and keep them
safe could be a boon to hopeful home buyers
during an extremely stressful and invasive time.
Imagine a mortgage underwriting process
where the potential buyer inputs all relevant
financial documents into the blockchain, making
the title company, the buyer's agent and so forth
readily available for the underwriting bank.

18

NOVEMBER/DECEMBER 2018

INCREASING TRANSPARENCY
WITH BLOCKCHAIN

Blockchain technology can also use the power of
the "distributed ledger" to increase transparency
among parties to a transaction and, potentially,
those who have oversight over a certain industry
or group of companies.
One of the primary causes of the housing bust
of the late 2000s was overleverage. Many individuals and small-time investors got caught up in
the housing boom and spent more on their house
(or houses) than they could afford. Money was
cheap, so to speak, and lending standards were
lax compared to prior eras in American history.
Many banks were overleveraged as well. Not
only did certain banks make loans that turned
out to be bad bets, many investment banks
traded in collateralized debt obligations (CDOs)
that were derivative securities designed to securitize and sell cash flows generated by mortgage
payments made by individuals.
However, because of the nature of the derivatives
trade in CDOs, there was nothing stopping a mortgage on the house at 123 Pine Street in Miami from
being securitized and sold three, five, even 20 times
in a short time span. If the mortgagee pays on time,
then all is well, and banks make money. However,
if the mortgagee defaults, the economic damage
spreads beyond the lien holder to all the banks holding CDOs based on the underlying mortgage.
The damage from default on that mortgage has
the potential then to be three, five or even 20
times worse. In some cases, banks packaged
derivative CDOs made of other CDOs (dubbed a
"CDO-squared"), bringing about the potential for
exponentially more financial harm.
What if blockchain allowed all parties and
potential parties to a transaction to see exactly
who owned each side of a financial transaction,
thereby making an opaque transaction more
transparent? What if a central bank, for example, could use blockchain to determine which
local markets were the most overleveraged in the
CDO market and use that information to warn
banks, adjust underwriting standards or modulate interest rates to mitigate risk?
By using blockchain to tie all CDOs and CDOssquared back to the underlying asset, parties
making a transaction could untangle a mess of
intertwined transactions to determine just how

I T I S I N N O VAT I O N



i3 - November/December 2018

Table of Contents for the Digital Edition of i3 - November/December 2018

Contents
i3 - November/December 2018 - Cover1
i3 - November/December 2018 - Cover2
i3 - November/December 2018 - Contents
i3 - November/December 2018 - 2
i3 - November/December 2018 - 3
i3 - November/December 2018 - 4
i3 - November/December 2018 - 5
i3 - November/December 2018 - 6
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i3 - November/December 2018 - 12
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i3 - November/December 2018 - 18
i3 - November/December 2018 - 19
i3 - November/December 2018 - 20
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