Is the syndicated loans market ready for distributed ledger technology?

Abstract

ABSTRACTThe syndicated loan market has a centralised nature dominated by intermediaries. Such a structure not only requires manual labour and back-office workloads, but it is also prone to human error and fraud. Distributed ledger technology (DLT) and smart contracts are promising tools to overcome the factors which adversely affect the efficiency of the current and classical business model in the primary and secondary market of syndicated loans. DLT eliminates the need for intermediaries; provides transparency, accuracy, and authenticity; lowers transaction costs; makes it easier to comply with Know Your Customer obligations; and provides efficiency in the secondary market for syndicated loans. However, existing legal rules and institutions fail to create a predictable and legally safe environment for the spread of DLT in the syndicated loans market. Therefore, proper regulation is required for the widespread use of DLT technology in the syndicated loan market.KEYWORDS: Syndicated loansblockchaindistributed ledger technologysmart contractsregulation Disclosure statementNo potential conflict of interest was reported by the author(s).Notes1 D Petrov, ‘The Impact of Blockchain and Distributed Ledger Technology’ [2019] International Scientific Journal Industry 4.0 88, at 90.2 For detailed information about this transaction, see L Gonzalez-Echenique, ‘Blockchain: The Future of Syndicated Lending?’ [2019] Butterworths Journal of International Banking and Financial Law 326, 326.3 L Noonan, ‘Banks complete first syndicated loan on blockchain’ (Financial Tımes, 6 November 2018) accessed 28 January 2023.4 P Martino, Blockchain and Banking: How Technological Innovations Are Shaping the Banking Industry (Springer 2021) 41.5 K Simons, ‘Why Do Banks Syndicate Loans?’ [1993] New England Economic Review 45, 45; A Fight, Syndicated Lending (Elsevier 2004) 1; J Ho, ‘Chapter 2 – Basic Principles of Syndicated Lending: Financing Through the Risk Spectrum’ in A Shutter (ed), A Practitioner’s Guide to Syndicated Lending (Sweet & Maxwell 2017) 9.6 Fight (n 5) 2.7 W Wild, ‘The Economic Basis of Syndicated Lending’ (PhD thesis, Queensland University of Technology 2004) 1; CE Aster and MA Attaway, ‘Syndicated Construction Loans, Defaulting Lenders, and Equitable Remedies’ [2016] Texas Tech Law Review 853, 859.8 DZ Nirenberg, ‘International Loan Syndications: The Next Security’ [1984] Columbia Journal of Transnational Law 155, 159.9 ME Jones, ‘Bankers Beware: The Risks of Syndicated Credits’ [1999] North Carolina Banking Institute 169, 173.10 ibid 173.11 PR Pollock, ‘Notes Issued in Syndicated Loans – A New Test to Define Securities’ [1977] The Business Lawyer 537, 538.12 Wild (n 7) 25; GA Goodman, ‘Special Problems of Syndicated Loans’ (Dentons, 14 April 2014) 4 accessed 28 January 2023.13 MHughes, ‘Transferability in Syndicated Lending’ [2007] Law and Financial Markets Review 21, 21.14 Wild (n 7) at 25.15 D Petrov, ‘A New Digital Age in Finance: Blockchain and Smart Contracts’ [2020] Horizons: International Scientific Journal 7, 9.16 I Callaghan, ‘Chapter 10 – Making the Loan: the Theory and Mechanics of Syndicated Lending’ in Shutter (n 5) 189.17 Simons (n 5) 45; LB Gutcho, ‘Syndicated Lending: Lead Banks and Syndicate Members’ [1994] International Business Lawyer 131, at 131; Jones (n 9) 177; SA Dennis and DJ Mullineaux, ‘Syndicated Loans’ [2000] Journal of Financial Intermediation 404, at 408; V Ivashina and Z Sun, ‘Institutional stock trading on loan market information’ [2011] Journal of Financial Economics 284, 284.18 Nirenberg (n 8) 161; Goodman (n 12) 2.19 Simons (n 5) at 45; Dennis and Mullineaux (n 17) at 407; Jones (n 9) 177.20 Aster and Attaway (n 7) at 858.21 Simons (n 5) at 46.22 Fight (n 5) 8.23 Nirenberg (n 8) 161.24 Loan Market Association, ‘LMA releases results of its members' survey: outlook for the syndicated loan market in 2021’ accessed 17 June 2023.25 Petrov (n 1) 88.26 Petrov (n 15) 9. 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