SUMMER 2024 NO.86 / THOUGHT LEADERSHIP BRIEF 2 While the adoption of blockchain technology by the financial sector is promising, little has been discussed, let alone empirically examined, whether the novel technology truly delivers the benefits or even ushers in a new risk arising from the potentially overrated sense of security. Indeed, both economics and legal literatures have suggested that permissioned blockchain may be subject to potential collusion among participants and in extreme cases, encourage such behaviour with a better cover than before. For example, accounting professionals worry that potential fraudsters could exploit the illusory reliability of blockchain in terms of data collection and verification to collude with confederate “third” parties. In this paper, we analyse two sides of the same coin, namely, whether the adoption of blockchain technology improves efficiency and transparency of financial transactions; more importantly, whether the potential weak governance in terms of social interactions among participants generates an illusionary sense of reliability; and finally, if the market is efficient, whether the market can understand such complexity and price it in. Our study builds upon several streams of literature: the narrowly defined ABS literature, the literature on tech adoption in finance, and the literature on sociological view of economic transactions. ASSESSMENT We analysed approximately 5,000 asset-based securities, ABS, deals or 14,000 tranches launched between 2015 and mid-2020 in China. In our empirical analysis, we consider only the following four types of ABS product where blockchain technology has been used for a fair comparison of the effect of blockchain adoption: RMBS, auto loan ABS, consumer loan ABS and account receivable ABS. In total, we gathered approximately 5,000 ABS deals with more than 14,000 tranches from WIND. The total market value of those ABS deals exceeds CNY8 trillion. Blockchain-based ABS products account for approximately 5% of all ABS products. See figure 1 for a visual illustration of a blockchain based ABS. Figure 1. An Illustrative Example of a Blockchain-based ABS Source: PKU Case, “The Application of Blockchain in Baidu's ABS Business”, 2021 Block Block Block Block Fund Transfer Daily Loan Management Services/ Repayment/ Repurchase Asset Sampling Information Due Diligence Report Transaction Structure Tiered Pricing Information Rate Setting Risk Control Conditions Issuing Institution Issuance Time Tiered Rating Results Cash Flow Repayment Information for Each Note Risk Monitoring Information Replacement and Repurchase Information Transfer/Management of Underlying Assets/Providing Difference Payments Custodian Bank (Industrial Bank) Due Diligence Product Design Alliance Chain Asset Party Trust Investor Party Regulation Law Firm Rating Agency Baidu ABS Cloud Platform Issuance and Purchase Duration Management Trust Loan Service Institution/ Repurchaser/ Buyer (ChangAn XianSheng) Original Beneficiary/ Asset Service Institution/ Difference Payment Obligor (ChangAn XianSheng) Registration and Custody Institution (China Securities Registration and Clearing Shanghai Branch) Priority and Subordinated Share Subscribers Distribution of Trust Benefits Trust Beneficiary Rights Raising Funds Technology Asset Trust Plan Single Fund Trust Establishment/ Management of Special Plans Priority and Subordinated Shares Subscription Funds Plan Manager/ Sales Institution (TF Securities) Behavior Baidu, ChangAn XianSheng, TF Securities 2017 First Phase Asset-Backed Special Plan Accounting Firm (Pan-China Certified Public Accountants LLP) Fund Custody Services Law Firm (Dentons) Rating Agency (United Ratings)
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