Control of “Digital Original” Central to Confidence for Growing Online Lending Ecosystem
During my recent trip to LendIt USA 2018 in San Francisco, I grabbed coffee with an investor I’ve known for a few years. As we caught up on how much LendIt has grown and the changing landscape of fintech with greater imprint of major banks, we recounted old stories of investors in the early days of marketplace lending having little of no control over the assets they were buying.
Indeed, the online lenders, which were popping up rapidly, were struggling to tell their own investors the status of the documents they were receiving. Were these legally binding? Were these the originals? Can you ensure there was no double pledging? Can you provide clear version and accessibility control? More often than not, the answer was a variation of “I don’t know.” And in some cases, that ended up burning an investor.
However, the more things change, the more they stay the same. With financial services’ far-off specter of blockchain (7-plus years to develop according to some experts), more and more lenders are providing vague assurances. After all, most marketplace lenders already have digital asset management processes in place, often custom built into their core platforms. Still, many of these in-house systems have poor or non-existent processes to ensure unique authoritative copies of the assets, also known as the “digital original” that truly represents ownership of the loan.
In their current state, they may accurately describe terms and obligations like a traditional paper contract. However, under the scrutiny of a court, they would lack authority. This lack of certainty and risk mitigation is not only troubling to current and future investors, but can and will become a problem for the lender in the future when dealing with loan resale/transfer, securitization, enforcement, compliance and dispute resolution.
With growth expected to continue, we believe several factors will come into play that will require marketplace lenders to have much more robust and certifiable digital asset management processes, ensuring that the ownership of the loan is unambiguous. These trends include: growth and new risks, higher compliance requirements of more and more institutional investors, and greater scrutiny of regulators.
In the long life of a loan agreement, there are often events that require a unique and verifiable version of the electronic contract that gives other parties both certainty and confidence about who owns the contract.
To address these issues, many investors seek the infrastructure and capital ecosystems built around the “digital original,” known in legal circles as the authoritative copy. Control of the digital original establishes unmistakable ownership, meaning a unique and verifiable version of the contract exists that represents the value of the loan.
By focusing on this digital original, it ensures originators and feel confident about the integrity and ownership of the asset through its entire lifecycle, should it be transferred, securitized, or simply sit in a secure and accessible digital vault. This approach mitigates risk and provides trust between loan participants and future investors.
If you would like to learn more about the importance of certainty in the digital financial ecosystem, please review our recent white paper, Creating Securitization eCertainty in the Secondary Market.