OpenLaw has partnered with the Loan Syndications and Trading Association (the “LSTA”) to explore how a revolving credit facility could be automated with blockchain technology to streamline both the origination of syndicated loans and the trading of those loans.
In collaboration with the LSTA, OpenLaw has developed an end-to-end prototype based on the LSTA’s form of Investment Grade Revolving Credit Facility to model how parties create a loan, execute key legal documents, automate certain interactions common to syndicates, and provide the building blocks for faster settlement of loan trades.
The purpose of this prototype was to explore how syndicated loans may be impacted by blockchain technology, assuming this technology continues to mature and become incorporated into the underlying fabric of commercial life.
Among the findings, the following emerged:
- The drafting of syndicated loan agreements can be automated, in part, using legal technology tools with evidence of the parties’ agreement and associated electronic signatures stored on a blockchain;
- Smart contracts can be used to automate certain aspects of loan administration, particularly responsibilities performed by the administrative agent, which in turn should potentially lower costs in the loan market;
- Blockchain technology and smart contracts can be used to hard code regulatory compliance, in the form of approved addresses that can help ensure compliance with U.S. KYC/AML requirements;
- Blockchain technology and smart contracts can be used to hard code disqualified lender lists to streamline the borrower consent process; and
- Blockchain technology can be used to digitally represent a lender’s interest in a syndicated loan, creating opportunities to shorten settlement times for syndicated loan trades.
However, the prototype also showed that for now, blockchain technology and associated smart contracts have certain limitations.
- For example, not all provisions of the LSTA Credit Facility can be converted into code-based provisions. Rather, only certain portions of the LSTA Credit Agreement could be converted into code-based provisions — those fundamentally representing provisions involving the transfer or management of the underlying loan. Other provisions that are more subjective in nature, like representations and warranties, cannot be represented as smart contracts and instead were maintained in the LSTA Credit Agreement as natural language provisions.
- Smart contracts can streamline the role of administrative agent, but will not entirely remove the agent from the syndicated lending process.
- Finally, there are practical limitations currently presented by smart contracts, because they can only interact with tokenized assets. Unless a digital asset gains widespread adoption — or there are additional services that make it easy to convert traditional fiat currency into digital assets — blockchain-based applications and services will take time to adopt.