Moody’s Ratings Agency Warns Against Risks Associated With Private Blockchains

On April 25th, rating agency Moody’s released a report titled

“Blockchain Improves Operational Efficiency for Securitizations, Amid New Risks.”

In the report, the rating agency highlights the growing attraction of blockchain technology to banks and others involved in so-called securitizations, or the conversion of debts and other financial assets into easily tradeable forms.

Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name.

The authors of the report write:

“New key transaction parties will be introduced to the process, namely the entities that serve as a developer, provider, and operator of a blockchain. They may be either closely linked or identical with the originator, or independent third-party service providers, which could lead to a certain degree of counterparty concentration risk.”

Moody’s is not the first organization to issue this warning. As early as July 2018, the European Banking Authority highlighted the potential for concentration risk arising from multiple institutions relying on the same blockchain provider,

“leading to macroprudential concerns, i.e. a possible single point of failure”.

Although not everything in the report showed blockchain in a negative light. They say that blockchain improves operational efficiency for securitizations but adds risk. It has been widely reported that Moody’s cautions on possible system risk in structured finance as blockchain gain traction.

Colin Ellis, Moody’s MD of Credit Strategy and co-author of the report said:

“Banks could benefit significantly from the development and implementation of blockchain technologies in terms of enhanced efficiency, cost savings, and risk reduction. But the adoption of these technologies will also limit processing fees, commissions, and gains on foreign exchange transactions, which will pressure revenue.”

The main issue here is that Blockchain is not a system that can run “in autopilot mode” — despite the technology’s ideological origins in the desire for currency free of the control of a central monetary authority.