Asset-backed securitization ranks high among the types of capital market product structures that could benefit the most from the blockchain revolution, said partners at DLA Piper; Cravath, Swaine & Moore; FisherBroyles; and Morgan, Lewis & Bockius, all of which have corporate clients with related projects underway.
The question is no longer if, but when, for these blockchain-based ABS products, said lawyers from the firms, although all cautioned that such novel transactions are unlikely to happen this year. Law firms, however, are already ramping up specific practice groups that cater to clients preparing to roll out certain initiatives in the blockchain space.
“The blockchain securitization market is still in its infancy,” said A. Michael Pierson, a partner in the securities and private equity practice at FisherBroyles. Pierson serves as co-chair of his cloud-based firm’s fintech and blockchain practice, which already has 18 lawyers despite launching less than a year ago. The group includes Adam Ettinger, a partner who joined FisherBroyles in March from Sheppard, Mullin, Richter & Hampton, where he served as co-head of that firm’s blockchain technology and digital currency team.
For his part, Pierson, as true for many lawyers currently engaged in blockchain-related practices, began his career in a traditional securities practice, having previously worked for the U.S. Securities and Exchange Commission and as an assistant general counsel at financial services giant The Goldman Sachs Group Inc.
Matthew Duncan, a partner at Morgan Lewis in London, where he joined the firm in 2015 from K&L Gates, said at least one of his clients is now working on a blockchain-based ABS deal. But the timing for a rollout of that matter ”remains subject to usual factors, such as market conditions, as well as the technical development work and testing,” Duncan said.
His clients, of course, “will not publicly announce a transaction—including a blockchain-based securitization—until it is ready to be launched in the market,” added Duncan.
David Kappos, a corporate partner at Cravath who focuses on intellectual property management and strategy and innovation-based assets, has seen interest in pilots and proof of concept projects for blockchain-backed ABS products, but nothing yet in the production stage. He too predicted those products will be introduced in the foreseeable future, and clients will be asking for Cravath’s help developing them.
Blockchain technology, particularly when paired with smart contracts and the digitized availability of data about underlying borrowers and lenders, lends “transparency and traceability” to ABS products, Kappos said.
At the end of this month, the Structured Finance Industry Group (SFIG) has scheduled a day-long CLE session, one in which blockchain appears on an agenda under the titles “hot topics” and “the future.” (The SIFG is an organization of 350 members, including institutional investors, issuers and other stakeholders in the securitization arena.)
The interest of SIFG members in blockchain should surprise few given that its distributed ledger technology makes the platform attractive for enhancing ABS since its products require less speed than other financial transactions, but more steps and backup data than most.
In general, ABS is the practice of packaging all kinds of contractual debt—such as commercial and residential mortgages, car loans and credit card obligations—and selling them to public market investors as bonds. When all the component transactions of an ABS deal take place through blockchain, each one will offer the bond developers opportunities to shed intermediary costs. With blockchain, each of those transactions will be secure, transparent, irreversible and immutable, said lawyers familiar with the practice.
Pierson, the FisherBroyles partner, said these qualities are “pretty enticing” for product development of ABS in the blockchain arena.
Any blockchain applications for ABS, however, ultimately will require the blessing of various regulators in order to reach publicly trading investors. The inevitability that regulators around the world will weigh in on these new structures increases the importance of outside legal counsel for developers of blockchain-based ABS products.
The SEC’s intentions to regulate blockchain-backed investment products became clear last December when chairman Jay Clayton issued a statement on the topic, Cravath’s Kappos noted. Clayton, a former Sullivan & Cromwell partner, said at the time that blockchain-backed investment offerings “continue to contain the hallmarks of a security under U.S. law,” adding, “I believe that gatekeepers and others, including securities lawyers, accountants and consultants, need to focus on their responsibilities.”
Since Clayton made his viewpoints known, legal advice has become more important to clients who are developing blockchain-backed ABS products, Kappos said.
“Lawyers have always been a bridge between the way states regulate and what business and individuals are aiming to do,” said Martin Bartlam, head of finance and projects at DLA Piper.
In the long run, Bartlam said lawyers advising clients who hope to introduce blockchain-based ABS structures should take heed to warn them to “avoid taking advantage of where the law is less certain” at the moment.
Individuals and entities eager to see a digitization of financial markets unfold on a sustainable basis must be willing to adopt a follow-the-regulators’-lead approach in an earnest manner, Bartlam cautioned.
“It is incumbent on all of us to do it in a way that doesn’t take advantage of uncertainties,” he said.
With big international financial institutions such as Banco Santander SA, Goldman Sachs, JPMorgan Chase & Co. and Wells Fargo & Co. launching in-house blockchain investment product development teams, demand has grown for lawyers with traditional securities practice backgrounds and fluency in the ever-changing vernacular of the blockchain enthusiasts’ world.
There is “a battle for talent,” said Bartlam, who joined DLA Piper in 2012 after leading the London office of Orrick, Herrington & Sutcliffe.
FisherBroyles’ approach to building out its blockchain practice “is probably emblematic of how a lot of other firms are doing this,” added Pierson.
A so-called virtual firm, FisherBroyles has grown from six to 2010 lawyers in just 16 years. Founded by technology lawyers, Pierson said that FisherBroyles counts among its clients technology industry titans such as Facebook Inc., Lyft Inc. and Tesla Inc.
When Pierson and other lawyers at the firm with traditional securities regulatory backgrounds meet with blockchain backers, he usually also invites one or two of FisherBroyles’ technology experts to join the gathering.
“That is how I staff my matters,” said Pierson about his client cultivation efforts.
FisherBroyles also deploys a nonlawyer technology consultant who is fully steeped in the most novel applications of blockchain. Pierson said the consultant often adds valuable insight during these early days of blockchain’s various applications, something particularly important for law firms that run the risk of initiating client relationships with blockchain innovators who could become either unpromising or problematic in the long run.
“[The consultant] will give us an idea of which clients to take and not to take,” Pierson said.