Finance, Securitization, & Smart Contracts

Building the New Economy of Movement

FINANCE, SECURITIZATION, & SMART CONTRACTS Business White Paper

June 2021

MOBIFSSC0001/WP/2021 Version 1.0 Authors INTRODUCTION Howard Altarescu, Orrick Phil Masi, BMW Bank Chris Ballinger, MOBI S. Chris Min, Orrick Joe Bannon, KAR Global Daniela Novaro, Reply The Mobility Open Blockchain Initiative is a global, multi- Michelle Corson, On the Road Lending Eric Pilat, Altaventure David Eddy, D.E. Consulting Andrew Smith, TQ Tezos stakeholder project working to co-design standards based Josh Fodale, Ford Credit Tram Vo, MOBI on distributed ledger technology for connected mobility Griffin Haskins, MOBI Marguerite Watanabe, MOBI Tu Le, USAA ecosystems. The project engages stakeholders across the transportation value chain, including vehicle FSSC Working Group Co-Chairs manufacturers, technology solution providers, Howard Altarescu, Orrick governmental, and non-governmental entities. This report Anthony Salamone, RouteOne is based on numerous discussions, workshops, and research. Opinions expressed herein do not necessarily FSSC Working Group Team Members

reflect the views of individual members or the companies Toby Box, Quant Network S. Chris Min, Orrick with which they are affiliated. Joe Bannon, KAR Global Charlie Moore, Global Debt Registry Anne-Sophie Cartray, ConsenSys Daniela Novaro, Reply Michelle Corson, On the Road Lending Eric Pilat, Altaventure Launched in March 2020, the MOBI Finance, Securitization, David Eddy, D.E. Consulting Dan Simerman, IOTA and Smart Contracts (FSSC) Working Group (WG) strives to Josh Fodale, Ford Credit Andrew Smith, TQ Tezos Don Ho, Quantstamp Jamie Solomon, Accenture improve accuracy and transparency, create operational Tu Le, USAA David Wattebled, Quant Network efficiencies, minimize fraud risks, and save on costs and Phil Masi, BMW Bank time in the execution of financings, including securitizations, for all entities in the financing lifecycle. MOBI Team Chris Ballinger, Co-director + Founder Griffin Haskins, Fellow Sincere thanks are extended to those who contributed their Tram Vo, Co-director + Founder Kelly Clark, Communications Manager Marguerite Watanabe, Working Group Lead Grace Pulliam, Communications Associate unique insights to this report. Robin Piling, Technical Lead 01 Executive Summary

03 The FSSC Standard

07 FSSC Use Cases Know Your Customer (KYC) Requirements Dealer Floorplan Financing Dealer Floorplan Auditing TABLE OF A Blockchain Foundation for Securitization Verifiable Credentials in the Loan Application Process Digitization of Manual Processes with Smart Contracts Loan Servicing Issuance and Investor Impact Reporting for Green Bonds CONTENTS V2X and Securitization Non Risk-Based Credit Fractional Ownership of Mobility Assets

25 Conclusion

26 Bibliography The vehicle finance Most of these retail and commercial finance contracts are ecosystem has many pooled, packaged into Asset Backed Securities (ABS), and components that can be financed by third-party investors in a process called characterized as trust securitization. Blockchain has the potential to reduce risks and services. Blockchain has the potential to radically improve, costs associated with the financing of vehicle loans, including or even fully replace, many of the securitization process, improve visibility of asset values and Executive these trust services. to replace the trust services currently in place. Blockchain and related ledger technologies have the potential to make the trust service function significantly more efficient, Summary transforming the role of financial intermediaries and delivering value to downstream businesses and consumers. Many processes within the vehicle and mobility industry will benefit from the standardization and digital efficiencies that blockchain enables.

Our financial system - including banking, auditing, MOBI’s FSSC Working Group The Mobility Open Blockchain Initiative’s Finance Securitization was created to accelerate the and Smart Contract Working Group (FSSC) was created to accounting, and many other components that can be impact of blockchain and accelerate the adoption and value creation from blockchain related technologies on many characterized as “trust services” - underlies markets for areas in the vehicle finance and related technologies, including smart contracts in the goods and makes all non-barter trade possible. The ecosystem. The FSSC mobility ecosystem as applied to consumer and dealer floorplan Working Group considered lending and financing. financial system is a network of trust services that both B2B and B2C use cases together permit markets to function efficiently. These in its investigation. This white paper will overview a variety of use cases that were considered by the FSSC WG. The Working Group considered trust services are quite expensive - transaction fees both B2B (business-to-business) and B2C (business-to- alone are estimated to account for almost 1% of global consumer) use cases, and each section of this paper focuses on 1 economic activity. B2B and B2C use cases separately.

1. “The Social and Private Costs of Retail Payment Instruments: A European Perspective”, In the US, almost 90% of new car purchases and more European Central Bank Ecosystem, September 2012, 2 “https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp137.pdf” than 50% of used car purchases are financed. Vehicles 2. “Automotive Industry Insights Finance Market Report Q4 2020”, Experian, March 2021, on dealer lots are likewise financed. https://www.experian.com/content/dam/marketing/na/automotive/quarterly- webinars/credit-trends/2020-quarterly-trends/v2-2020-q4-state-automotive- market.pdf

Modern vehicles and trucks are increasingly connected, intelligent, interoperability. Truly exciting advances become possible when we endowed with large amounts of computing power, and have a wide are able to seamlessly and easily share data with each other, with range of sensors that can capture data about the vehicle and its the necessary shared functionality assured. These abilities are surroundings. Connected vehicles are beginning to dominate global called data interoperability and functional interoperability; both are roadways, and the mobility industry has quickly focused on how difficult to achieve at scale. Within the vehicle finance ecosystem, newly available data from those vehicles can be used to power there is very little interoperability between the siloed data systems exciting new applications. However, there are some major barriers of the participants. Lenders, rating agencies, servicers, OEMs, to fully actualizing the value of these developments. Most notably, vehicle dealers, and other organizations operate almost entirely with the organizations and companies that would utilize vehicle data a siloed model, and most still rely heavily on trusted third parties to operate entirely within data silos, and integrating their closed mediate and manage multiparty processes. systems with external partners or data sources necessitates building costly integrations every time. As a result, any The staying power of trusted third parties is no accident - financings coordination or data sharing occurs bilaterally, but such a one-to- of all kinds are subject to regulation, scrutiny, and potential liability, one approach does not lend itself to scalability, transparency, often necessitating the use of trust services. For example, in vehicle openness, or economic efficiency. loan securitizations, a third party is often required to carry out various functions, including servicing and trustee responsibilities Executing multi-party applications requires that each party is able such as receiving funds and distributing payments to various parties to communicate and coordinate actions. In other words, multi-party according to a waterfall structure. Such a third party is providing a systems require that each participant’s system have a degree of trust service.

Blockchains provide a trust Blockchain, ultimately, provides a trust layer, in that it provides a value is tied to the level of adoption and the number of layer, where the trust arises secure avenue for stakeholders to authenticate each other’s stakeholders. The diversity of features and range of feasible use from the immutability and identity and to immutably record their secured information and cases of a distributed ledger system are thus married to its transparency of data on the to securely expose such information to other permissioned network effects. Such network effects grow as adoption grows chain, as well as the shared governance of distributed stakeholders. For example, instead of using a costly third party, over time. ledger systems. a smart contract can disburse funds according to a pre-defined and agreed upon waterfall structure. All parties can trust in the The core services and logical The FSSC Standard’s main components - core services and schemas prescribed by the accuracy of the payments, as everything is transparent on chain. logical schemas - provide the structures required for creating FSSC Standard are key for and scaling multi-party applications, allowing communication Ultimately, the ability to trust arises from the immutability and creating and scaling multi- and collaboration between the siloed ecosystems of each transparency of data on the chain and the shared governance party applications and of distributed ledger systems. Distributed ledgers, with allowing communication and vehicle finance stakeholder. Such structures lay the foundation standards enabling necessary data and functional collaboration between the for robust, secure data sharing and value transacting at scale. siloed ecosystems of each interoperability, provide a necessary, foundational layer for The FSSC Standard carefully and effectively distinguishes vehicle finance stakeholder. creating multi-party applications on top. However, breaking between what sorts of data and functionality must be standard down these silos requires more than just technology - it requires across all implementations, versus what considerations are best community buy-in and coordination. left up to the engineers. Standards are much like mobility ecosystems and distributed ledgers, in that they all rely on The FSSC Standard Interoperability can only be achieved when there are common network effects to provide value. The FSSC Standard enables a prescribes core services and standards for core infrastructure - identity, data, and functions. compelling array of use cases, and those use cases will grow in logical schemas for data The FSSC Standard prescribes core services and logical number, complexity, and value as adoption grows over time. sharing between vehicle schemas for the sharing of data between vehicle finance finance stakeholders with the Distributed ledger technology Given the widespread use of various types of trust structures goal of achieving functional stakeholders. In other words, the FSSC Standard is a provides technological trust and data interoperability. foundational step towards achieving data interoperability and within vehicle finance and securitizations, distributed ledger structures that can replace technology has enormous potential to quickly disrupt many functional interoperability for multi-party financial applications many third-party in mobility ecosystems. This allows for the proliferation and intermediaries or processes traditional processes. Distributed ledger technology provides growth of multi-party solutions, enabled by the frictionless flow that require onerous manual technological trust structures that can replace many third-party of data between these silos. verification. These trust intermediaries or processes requiring onerous manual structures enable a diverse verification. Therefore, the trust layer that is provided by Multi-party applications, as the name implies, involve multiple array of benefits to many distributed ledger technology can quickly provide value within a varied use cases, which are parties interacting in a shared system to achieve a mutually explored in detail for the wide range of use cases within vehicle finance and beneficial outcome. Therefore, it necessarily follows that remainder of this paper. securitization. The remainder of this document provides an systems supporting multi-party applications require an existing overview of is focused on overviewing these use cases and their set of parties to use those systems. In other words, multi-party benefits. systems rely on network effects to succeed, and indeed, their

In both the US and the EU, In the U.S., the adoption of the Patriot Act made it incumbent financial institutions must upon banks and other lenders, including vehicle dealers, to verify comply with KYC/AML the identity of borrowers (their customers) to avoid facilitating regulations in order to avoid FSSC money laundering, terrorism financing, or other criminal activity. facilitating money laundering, terrorism financing, or other The KYC requirement applies to all loans, no matter the size. criminal activity. Financial institutions must comply with two key components of Title

III of the Patriot Act – the Customer I3dentification Program (CIP) and Customer Due Diligence (CDD). In the European Union, anti- USE CASES money laundering requirements are included in the 4th Anti-Money Laundering Directive (4AMLD), and the specific provisions on electronic identification and trust services are covered4 in Regulation (EU) No 910/2014 (the "eIDAS Regulation").

Each bank has the discretion Each bank has the discretion to use whatever process it chooses to use whatever process it to verify the identity of a customer and may require different chooses to verify the identity information. At a minimum, an individual customer is ordinarily of a customer. Financial asked to provide government-issued identification, such as a institutions are required to report if they have reason to passport or driver’s license (or both). If the customer is a business, suspect criminal activity. the customer may be asked for filed formation documents and/or These processes are references. In both cases, financial institutions will often review Siloed business lines within Many banks are running on computing systems with inefficient expensive for banks and information from a credit reporting agency. There is no standard, and across institutions and data capture methods. Siloed business lines within and across cause friction with uniform approach for establishing a customer’s identity. jurisdictions lead to redundant institutions and jurisdictions lead to redundant processes and customers. processes and a poor user when the customer is required to repeatedly provide the same Financial institutions are required to report if they have reason to experience. The inability of banks to reference a common information, a poor user experience. The inability of banks to suspect potential criminal activity, including reporting on activities dataset reduces the reference a common dataset reduces the efficiency of the that look high risk, such as frequent wires and international efficiency of the diligence diligence process, creates ambiguity, and may result in transactions. The process is expensive for banks and causes process. inaccurate conclusions. Reducing or eliminating manual friction with customers. interpretation allows for an enhanced data-driven decision-

3. “KYC vs. CIP vs. CDD | Know Your Customer Rules and Guidelines”, AdvisoryHQ, accessed making process. The ability to augment a customer profile that April 2021, https://www.advisoryhq.com/articles/kyc-vs-cip-vs-cdd-know-your-customer- is accessible to a broad network of financial institutions will rules-and-guidelines/. reduce risk, can enhance the customer experience, and bring 4. Charles Krier, Katharina Wagener, “eIDAS and AMLD5: A perfect match?”, PayTechLaw, September 2020, https://paytechlaw.com/en/eidas-and-amld5-a-perfect-match/. down compliance costs.

The objective of this use Most financial institutions use at least some information from Lenders often pool loans into institutions owned and operated by original equipment case is to reduce costs that third-party service providers, although the data and information ABS transactions. A vehicle manufacturers or “OEMs”), and specialized lenders in the vehicle financial institutions incur in services vary. Enabling systems integration with third-party ABS is similar to a mortgage- wholesale industry, including those owned by wholesale auction complying with KYC backed security, except that service providers would reduce repetitive information requests companies that lend money to dealers purchasing vehicles at regulations by building a the underlying assets that standardized approach to a of the customer and would allow for consistent use of form the collateral are a pool such auctions. global digital customer independently verified diligence. of loans secured by vehicles identification system. purchased and owned by car These lenders often pool these loans into ABS transactions. An Customers naturally appreciate simple, fast, and seamless dealers. ABS is an investment security—a bond or note—which is backed journeys. As new relationships are increasingly remote, by a pool of loans, in this case floorplan loans secured by new especially in light of the Covid-19 pandemic, an efficient KYC and used cars. A vehicle ABS is similar to a mortgage-backed process should contribute to an improved customer experience security, except that the underlying assets that form the in the customer journey for the purchase of a vehicle. collateral are not residential mortgage loans secured by residential properties, but rather, in the dealer floorplan The objective of this use case is to reduce costs that financial securitizations, a pool of loans secured by vehicles purchased institutions incur in complying with KYC regulations by building a and owned by new and used car dealers. standardized approach to a global digital customer identification system. A digital customer ID that is compatible Blockchains and smart Blockchain and smart contracts can enable a dealer (a with blockchain technology (and, of course, consistent with contracts can enable a dealer borrower) to better monitor and manage multiple maturities of applicable privacy laws and regulations in relevant jurisdictions) to better monitor and manage the loans financing its vehicles. For dealers, a common mistake multiple maturities of the can be a catalyst to virtually connect silos of KYC diligence is a failure to track loan maturities and to realize that many of loans financing its vehicles. systems between institutions across the world. Alerting dealers to upcoming these loans mature at the same time – although each vehicle loan maturities allows the could have a vastly different sales cycle. Smart contracts can be dealer to better coordinate a created to alert dealers to upcoming loan maturities and to Dealer Floorplan Financing floorplan financing better enable the dealer to coordinate a floorplan financing management strategy. management strategy with its vehicle sales strategy and Dealer floorplan financing is a Dealer floorplan financing, among other things, is a form of expectations. form of inventory financing for inventory financing for a dealer of vehicles and trucks, in which a dealer of vehicles and trucks each loan, or advance against a floorplan credit facility (also where each loan is secured by known as an “asset-backed loan”) is secured by a specific piece a specific vehicle or truck. of collateral, i.e., a specific vehicle or truck.

Lenders in the dealer floorplan finance space include commercial banks, captive finance companies (financial

Dealer Floorplan Auditing process. Using distributed ledger technology to replicate the audit process, and the ability to reconstruct the source information for audits on demand should increase confidence in The primary purpose of a The primary purpose of a floorplan audit is to reconcile dealer the validity of the audit system. floorplan audit is to reconcile inventory used as collateral for the floor plan loan to reduce the dealer inventory used as lender's risk. The main objective is to capture the VIN number collateral for the floor plan and to confirm the presence of the vehicle at the dealership. loan to reduce the lender’s A Blockchain Foundation for Securitization risk. The main objective is to Gathering this information and accurately reporting it in a capture the VIN number and trustworthy fashion represents a significant operating cost. Vehicle loan securitizations Vehicle loan securitizations provide a crucial source of funding to confirm the presence of Floorplan audits are intended to identify fraud, intentional or provide a crucial source of and liquidity to the vehicle industry. Securitization transactions, the vehicle at the dealership. otherwise, by dealers, including double-flooring (when a dealer funding and liquidity for the however, can be complex and costly, involving many transaction Gathering this information vehicle industry, but they are takes out a line of credit with two lenders on the same set of parties and a vast amount of data that must be obtained, accurately represents a complex and costly, involving vehicles); and a dealer has sold vehicles out of trust (SOT) significant operating cost. many transaction parties and secured, and reviewed multiple times by various intermediaries (where a dealer fails to repay an inventory advance and sells a vast amount of data. The in each step of the financing process. the underlying vehicles), among others. FSSC WG has identified and compiled a list of data The FSSC WG has identified and compiled a list of data elements commonly required Distributed ledger technology Audit solutions can be evaluated on a spectrum that ranges elements commonly required in connection with the origination in the securitization of loans. can be used to eliminate the from simply taking a dealer at their word all the way to a The goal is to improve the and securitization of loans. The goal is to improve the efficiency cost of a dealer floorplan perfectly reliable connected car future with autonomous efficiency of various multi- of various multiparty processes involved in securitization by audit by capturing data vehicles reporting their location and condition in real-time. party processes involved in elements like the VIN, GPS, creating a common understanding by lenders (as securitizers), securitization. and time of day. By leveraging Existing solutions rely heavily on Inventory Control Personnel the rating agencies, and investors of the data elements required the availability of verifiable (ICP). ICPs are either internal employees or those from a third- for these processes, and the homogenization of information data, the onerous manual party company contracted by the lender to confirm the relevant required from such lenders and considered by rating agencies verification can be avoided details of the financed inventory. and investors. Also, the use of common data elements in loan entirely. originations can further standardize related securitizations, Distributed ledger technology can be used to eliminate the cost improving transparency into the underlying loans and liquidity in of the ICPs with a technical solution that replicates the trust the markets. Blockchain technology can provide such data in a level in the existing system while also providing a pathway for trustworthy, secure and immutable format, that could result in more efficient collection of data in the future. A high degree of efficiencies and cost-savings for all parties involved. trust can be maintained by capturing primary data elements like VIN, GPS, time of day, etc. In addition, metadata can be used The creation of a common and trustworthy reference to capture second order trust indicators like time between architecture allowing multiple stakeholders to expose their data captures, physical movement, distance covered, etc. Lenders, as to shared, multiparty applications, may also provide the well as securitization investors, must be able to trust the audit opportunity for smaller lenders to sell loans into warehouse

The creation of a common facilities. Then, such lenders would be able to utilize It is essential that the rating Smart contracts can also be used to efficiently bundle loans and trustworthy reference securitizations to finance the loans originated, thus providing agencies, investors, and other with certain characteristics together for securitization purposes. architecture allowing multiple the benefits of rated securitization financings to lenders for participants in the It is essential that the rating agencies, investors, and other stakeholders to expose their securitization process have whom such capital market efficiencies may not be otherwise participants in the securitization process have confidence in the data to shared, multi-party confidence in information applications, can ultimately available. made available by the information made available by the network. Accordingly, it is allow for the reduction or network. Industry wide also critical that the data attestations be placed on blockchain elimination of the need for Elimination or reduction of the need for multiple verifications of consensus on how these by a trusted third party or that the accuracy of the data multiple verifications of data data by third parties and related due diligence costs may also processes are to be carried notarized on blockchain be verified by a trusted third party. or repetitive due diligence by out, and what verification be possible by putting data on a trusted blockchain. Cost Alternatively, the process by which the information is verified third parties. looks like, are critical for savings from a streamlined securitization process through the trustability. and notarized on blockchain can be automated through smart use of a single trusted blockchain database would lower the contracts. Or, the lenders can require the source of information cost of entry for many smaller players in the vehicle to be notarized on blockchain which allows for the digital securitization industry, giving them access to a valuable funding authentication of the information, which could significantly source. reduce the reliance on third-party verification. In any case, it may prove useful to have industry-wide consensus on one or A single source of truth can Reductions in transaction costs mean that it can be cost- more of these processes, including on the parties that would be help eliminate the need for effective to enter the securitization market with a smaller deal trusted to verify the accuracy of the information on blockchain paper-intensive processes size, which can further lower the hurdle for smaller lenders. A derived from the database. and additional loan-level diligence at the time of single source of trusted data may diminish, if not eliminate, the securitization, which need to diligence the accuracy of information mined from loan diminishes opportunities for applications, loan agreements, related contracts, and other Verifiable Credentials in the Loan Application Process fraud or errors. documents. For example, tracking the underlying vehicles and their associated loans and their ownership is often a paper- A verifiable credential is a set A verifiable credential is a set of tamper-evident claims and intensive process, requiring a time-consuming process of of tamper-evident claims and metadata that cryptographically prove who issued it. By storing scanning pages, establishing and securing “authoritative” metadata that that cryptographic proof on blockchain, it can be easily cryptographically prove who copies, and multiple manual verifications and diligence reviews. accessed for use in various applications and processes. issued it. They are the Such a process, which is typically conducted manually, is also electronic equivalent of Verifiable credentials are the electronic equivalent of the prone to error, and may present opportunities for fraud. Making physical credentials we use physical credentials that we all use today, such as plastic cards, relevant data and other information accessible through a single today, like drivers licenses. passports, driver’s licenses, paper credentials, and awards, trusted blockchain could help eliminate the need for additional They can be used in many among others. Verifiable credentials can be utilized in many processes within the credit loan level diligence at the time of securitization and diminish components of the vehicle credit application process. Some application lifecycle. opportunities for fraud or errors. examples are provided below.

Verifiable credentials can Verifiable credentials can assist with data authenticity and Digitization of Manual Processes with Smart Contracts assist with data authenticity verifications. A standard vehicle credit application contains and verifications. A standard several data elements provided directly by the customer. Some Smart contracts can be used Smart contracts may be used to automatically implement, vehicle credit application of these data elements, such as annual income amounts, are to automatically implement contains many data elements without the need for third-party intervention, the conventional conventional contractual provided directly by the key pieces of information used in the credit decision process. contractual arrangements in a securitization and the underlying arrangements in a customer. Verifiable Today, a variety of often manual processes exist to verify an financing (i.e., the servicer obligations to collect borrower securitization and the credentials can eliminate the applicant’s income. For example, lenders may need to reach out underlying financing, as well payments and remit such payments to a securitization account, manual verification and contact the applicant’s employer, in order to confirm their as programmatically execute pursue borrowers to collect delinquent payments or to pursue processes that are employment status. Lenders may also require copies of pay many processes involved traditionally employed for recoveries in defaulted loans, and allocate payments to within the securitization or those data elements. stubs or previous tax returns. All of these processes are time investors pursuant to waterfall provisions in the relevant loan. consuming. Verifiable credentials carried by an applicant could agreements. alleviate many of these pain points. For example, a verifiable credential signed by an employer or bank could automatically One prime example of where One prime example of an area in which smart contracts can and authoritatively confirm an applicant’s employment status smart contracts can streamline traditional vehicle finance and securitization is and income level. Such a confirmation could be carried out in streamline traditional waterfall distributions and reporting. An immutable and time- mere seconds as the credential is verified against a registry via processes is executing the waterfall distributions and stamped chronology of borrower payments, and a verified smart an Application programming interface (API) call. reporting. Smart contracts contract that provides for the distribution of such payments can execute the distribution based on the waterfall, could diminish if not eliminate the need Verifiable credentials can Verifiable credentials can also be leveraged to help protect of interest and principal also help protect customer for investors to do monthly payment reconciliations. Smart customer privacy. Lenders often acquire and store copies of payments to the investors privacy by reducing or contracts can securely execute the distribution of interest and an applicant’s personal documents, such as driver’s licenses or and charge the fees to eliminating the lender’s need principal payments to investors and fees to transaction parties other government IDs. Verifiable credentials can reduce or transaction parties pursuant to see and keep copies of to the waterfall, eliminating pursuant to the waterfall, without manual allocations, reporting, personal documents. This remove the lender’s need to see and keep such copies, as the the need for a third party to and wire transfers. Blockchain technology allows for seamless, helps reduce oversharing of data is passed digitally and its authenticity can be confirmed by provide such a trust service. trusted, and audited sharing of data among all of the personally identifiable the cryptography. In addition, verifiable credentials can participants in the transaction while being assured that the information during the credit potentially leverage cryptographic techniques, such as zero- application process. potential for fraud or errors has been diminished, if not knowledge proofs, to mask the types of information given to a eliminated. lender. For example, a credential could prove that an applicant makes more than $100,000 per year, without giving away their A typical vehicle loan ABS transaction produces investor reports exact income or it can prove that such an applicant graduated on a monthly basis with payment information and loan with a four-year college degree, without specifying the college performance data from a prior month, resulting in a or major (which would typically be on a diploma). This can help considerable data lag of up to 30 or more days. Smart contracts reduce oversharing of unnecessary personally identifiable can track payments, delinquencies, and other performance data information (PII) data in the credit application process.

on blockchain and make such data available on a real-time lower-income consumers, whose bank accounts can be more basis to all the permissioned actors in a transaction, eliminating volatile, by avoiding the potential for overdraft fees. These the need to rely on stale data and manual processes, increasing better on-time payment performance metrics can also boost transparency for the related securitization. their credit scores.

While the initial use of smart Smart contracts must, of course, be consistent in all respects Allowing settlements to be For cross-border transactions, allowing settlements to be made contracts is not likely to with the terms of the related documents and the rating made directly, rather than directly, rather than via existing protocols like SWIFT, can replace the transaction agencies and investors must have confidence that this is the through existing protocols, facilitate international lending for consumers in emerging parties traditionally used, a can facilitate international case. The initial use of smart contracts in securitizations is not markets. Rather than using correspondent banking and custodial smart contract that is lending for consumers in publicly available and subject likely to replace the transaction parties conventionally used, at emerging markets. This is service arrangements, transactions can be settled publicly and to audit by market least until the time when rating agencies and investors have full also made possible by the transparently. participants will be able to confidence in such replacements. However, having a smart cost reduction associated carry out tasks currently contract, publicly available and subject to audit by the market with providing that credit By removing intermediaries and their associated fees, loan performed by such through removing participants, could help streamline the diligence process. If the servicing activities have lower transaction costs. The ability to transaction parties, which intermediaries and their could save on diligence market participants can trust in the integrity of the smart associated fees. provide transparent and cryptographically secure payment costs. contract being utilized, and the accuracy with which it can histories can bring down costs by reducing the need for perform various tasks that are currently performed by third-party redundant services within portfolio transactions for smaller intermediaries, the diligence that is typically necessary to ensure lenders. the accuracy of the tasks performed by such intermediaries can be reduced, and can therefore result in both time and cost savings. Issuance and Investor Impact Reporting for Green Bonds

Green bonds are bond Green bonds and their variants are bond issuances that have an Loan Servicing issuances that have an environmental purpose and which are structured to appeal to environmental purpose and Environmental, Social, and Corporate Governance (ESG) are structured to appeal to Most settlements are not One of the benefits of distributed ledgers systems is the ability investors. To avoid instances of “greenwashing” – labeling ESG investors. Green bond reflected in real time; there is to remove both the friction and costs of intermediaries. Most issuances require both pre- projects that are potentially harmful to the environment as a lag between the time of the settlements are not reflected in real time. When a consumer and post-issuance evaluation beneficial -- green bond issuances require both pre- and post- payment and when the makes a loan payment, there is a lag between the time of and reporting that ordinary issuance evaluation and reporting. For the issuance to be payment is actually “settled” bonds do not. in the lender’s account. payment and the time the payment is actually “settled” in the marketable, a Second Party Opinion (SPO) regarding the impact Blockchain allows lender’s account. With blockchain, these settlements can occur and credibility of the proposed framework in relationship to the settlements to happen in in a matter of minutes, rather than days. While this obviously Green Bond Principles accepted in the ESG marketplace is minutes, rather than days. benefits the lender, it can also benefit the borrower, particularly required. The review includes an evaluation of the intended use

of proceeds, the process to evaluate potential projects for There is a great opportunity transfer (St. Regis Hotel), few parties have thus far used 5 eligible sustainability criteria, management of proceeds for for blockchain applications to blockchain for payments and settlements. Because securities compliance with issuer’s Green Bond framework, which outlines disrupt the real estate issuances require many intermediaries and delayed settlement transactions space. their intended green objectives, and reporting on the actual times, there is great opportunity for cost reduction, investment allocation of proceeds and relevant impact metrics. democratization, and the ability of smaller green bond issuers to enter the marketplace using blockchain. The evaluation criteria for Most SPO providers have proprietary systems for capturing and these offerings is fairly disseminating the pre-issuance SPO, but the evaluation criteria As green bond issuances become more prevalent, the ability to standardized, so a database is fairly standardized, so a database schema development demonstrate compliance with green bond standards will schema development within blockchain is a viable option within blockchain is a viable option to bring down transaction become a valuable tool. to bring down transaction costs for issuers. For post-issuance reporting, distributed ledger costs for users. technology offers an immutable and transparent way to demonstrate impact. Standardization of impact reporting is V2X and Securitization beginning to occur, including by the Partnership for Carbon Accounting Financials, which adopts uniform approaches by With hundreds of millions of More than 650 million vehicles are already connected to OEMs asset class. For passenger vehicles, direct emissions from fuel connected vehicles on the worldwide. This figure will only increase in the coming years with combustion and indirect emissions from electricity generation road worldwide, both OEMs cars equipped with 4G SIM cards and soon 5G. Thus, masses and vehicle owners have for EVs can be captured on blockchain and measured in amounts of data related to vehicle usage will become a access to massive amounts relationship to the targeted reductions stipulated by an issuer in of data, which will only potential new source of revenue for OEMs but also for vehicle its green bond issuance framework. In-vehicle telematics can continue to grow over time. owners thanks to the General Data Protection Regulation provide much more accurate information on miles traveled and This data is valuable and can (GDPR) in the EU, which will give these owners a right of greenhouse gasses emitted (for gasoline-powered vehicles) be monetized in various ways. ownership and access to data. Information on road and mobility directly from the vehicle to the blockchain. Electric vehicles infrastructures, cars and drivers will be available in deferred (EVs) can report on miles traveled and electricity consumed, time and/or in real time due to the advances in connectivity, which can then be correlated with the emissions generated at artificial intelligence, blockchain, and other technologies. the grid level. This kind of real-time impact reporting would enable green bond issuers to efficiently provide a transparent, Several players in the vehicle data marketplace already collect immutable record of compliance with their stated goals, adding the data from certain OEMs and resell it to other OEMs, local efficiencies to the market. mobility authorities, mobility operators and others.

Some lenders have used blockchain in the structure, registration, sale and distribution of green bonds. While some real estate 5. Robert Hackett, “Ritzy Aspen Hotel Sells Real Estate on Blockchain with Indiegogo’s Help”, transactions have used tokenization to record ownership Fortune, August 2018, https://fortune.com/2018/08/23/hotel-real-estate-aspen- blockchain-ethereum-st-regis-indiegogo/

Thanks to advances in For real-time data, thanks to 5G and the low transfer latency The combination of fast small exception of tolled highways, marginal cost pricing isn’t connectivity technologies, that this technology offers, it will be possible to exchange vehicle connectivity, easily possible for much of this infrastructure. Hence, much of the vehicles will be able to information in V2X (connected vehicle-to-everything communicable geolocation, world’s transportation infrastructure is provided as a public exchange data between and secure identities will allow communication) and in particular between vehicles to improve good, leading to chronic infrastructure financing deficits and themselves and surrounding for micro-tolling and dynamic infrastructure in real-time. safety and the driving of semi-autonomous, even autonomous pricing. With micro-tolling inequities in use and payment burdens. The combination of fast This rapid data exchange and cars and supplying information to DAS-type equipment, for providing predictable cash vehicle connections, enhanced positioning, and decentralized overall data availability can be example: exchange of information to avoid a collision in the flows, those revenue streams identities will permit efficient tolling for much of this leveraged within many use event of a road accident or a sudden traffic jam, payment for a can then be securitized, infrastructure, predictable cash flows and ushering in a massive cases. ushering in a massive new new road infrastructure which will be financed on the basis of new asset class available for financing through securitization. asset class. its use per kilometer by motorists, etc.

Vehicle wallets will be critical Vehicles equipped with an on-board hard-wallet will be able to Non-Risk-Based Credit to monetizing telematics data monetize in real time this information transmitted peer to peer in real-time, as they will be thanks to the execution of smart contracts giving payment able to execute payments Blockchains allow for the The issuance of debt, at its core, is a statement of trust. In the orders and making financial settlement. These smart-contracts associated with transacting creation of a digital identity, past seventy years, since the advent of bank issued credit cards, will distribute payments between the various stakeholders of the that data. Moreover, smart unlocking the real-time financial institutions have used credit scoring as a proxy for risk contracts will enable new road vehicle and data infrastructure according to the stipulations of potential to use other analysis since it allows for instant credit-decisioning. and infrastructure pricing the agreements integrated into the smart-contracts. In this indicators to build a Unfortunately, for those who have thin or no credit files, their risk systems. model, all stakeholders, OEMs, vehicle owners, data reputational asset profile for otherwise credit-invisible profile is not easily quantifiable and is, therefore, priced higher infrastructures, and others are encouraged to cooperate consumers. than might otherwise be the case. according to this model of intelligent “coopetition”. This model makes it possible to avoid recreating data oligopolies as has Credit scores are lagging indicators of risk, using data that may been done on the Internet with Google, Apple, Facebook, and not be current. They are also built on inductive reasoning and others. assuming that the past is a predictor of the future. Blockchain provides a way to establish an individual digital identity, In addition, smart contracts will make it possible to isolate unlocking the real time potential to use other indicators (such as revenues and thus the possibility of financing of new road and cell phone payments that could be recorded on chain) to build mobility infrastructures, including through securitizations. a reputational asset profile for otherwise credit-invisible Global transportation infrastructure is expected to require over consumers. This strategy may be particularly useful in emerging $94T in investment between 2016 and 2040.6 With the relatively economies that lack trusted credit scoring models.

6. Oxford Economics, Global Infrastructure Outlook; Infrastructure investment needs 50 The ability to track non-traditional sources of credit, such as countries, 7 sectors to 2040”, https://www.oxfordeconomics.com/recent- payments for utilities, phones, or rent, can make credit more releases/Global-Infrastructure-Outlook.

For thin-file applicants, this readily available to these consumers who are not active A fractional ownership model transportation models appear on the market, such as car sharing provides accessible credit in participants in the conventional financial system. The may prove to be a cost- and new or used car rental of varying duration. However, we a system otherwise microfinance movement facilitated peer-to-peer lending with effective and desirable expect that outright ownership may remain a popular unavailable to them. This may alternative to vehicle funds from developed countries flowing to borrowers in preference. The desire to take your own car for a weekend be particularly useful in ownership for many. emerging economies without countries with less developed financial markets. Allowing for the Blockchain technology allows getaway may remain, for many, the first choice for a long time. credit scoring infrastructure. development of an alternative risk assessment process, using for the immutable recording The development of a fractional ownership model (ownership of data captured on blockchain, could bring together a wide pool and cost accounting between an vehicle by multiple individuals, each of whom has specified of potential lenders and borrowers. parties, and the tamper-proof ownership and usage rights) may respond to the low rate of use recording of shared-usage of vehicles while honoring, to a certain extent, the desire to own rights and restrictions. a car. Such a model becomes possible with the use of Fractional Ownership of Mobility Assets blockchain technology, including payments directed through smart contracts. We can also imagine a model of individual or Today, cars in metropolitan The vehicle has been a symbol of emancipation and freedom for corporate fractional ownership of autonomous vehicles or robot areas are used only 5-10% of most of the 20th century. Freedom of movement has become taxis. the time. The rest of the time, available to almost all. The growth in vehicle sales over the past the cars sit still in lots or on 20 years, particularly in China where sales of new cars have With the capacity of immutable, and tamper-proof records and streets. These vehicles are productive capital, but sit risen from 0.6 to 25.3 million annually, demonstrates the measures, cost accounting between owners is done unmonetized and unutilized importance of this freedom of movement. programmatically. Owners through their fractional ownership for over 90% of the time. right get a shared use right and are liable for their obligations The vehicle makes it possible to get from point A to point B based on their share of ownership and the use they make of that relatively efficiently, to find a job more easily, to go on vacation vehicle. or to go out on weekends. The car is a sign of freedom and also a display of social status for some. But today, cars in This model is virtuous because the users of the cars are also the metropolitan areas are only used 5% to 10% of the time. The rest owners. They are therefore collectively responsible, as opposed of the time, cars remain immobilized in parking lots or are to a classic car sharing model provided by a platform operator parked in the streets. In addition, private car travel is where nobody is responsible. In addition, in the case of the increasingly restricted or banned in major cities in order to sharing models managed by OEMs, the OEMs are obliged to reduce traffic jams, make way for public transportation or bikes, provide capital and/or financing to finance the cars, with very and to cut down on carbon emissions. In this context, we can poor financial performance so far. see that the current model is not totally satisfactory for the owners or for municipalities. Blockchain technology has the potential to make it possible to develop fractional ownership on a scale larger than previously The market is increasingly moving towards transportation models experienced. where travel is consumed as a mobility service. Different

Blockchain technology is strongly positioned to create widespread shifts within the AdvisoryHQ. “KYC vs. CIP vs. CDD | Know Your Customer Rules and Guidelines.” Accessed traditional processes of vehicle finance. The widespread presence of trust services April 2021. https://www.advisoryhq.com/articles/kyc-vs-cip-vs-cdd-know-your- customer-rules-and-guidelines/. throughout those processes are precisely where distributed ledger technology provides value. The potential for smooth, frictionless operation of multiparty European Central Bank Ecosystem.“The Social and Private Costs of Retail Payment Instruments: A European Perspective.” September 2012. applications by ensuring the availability of trusted shared data is enormous. “https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp137.pdf.

Blockchains provide the fundamental technology, but multi-party applications Experian. “Automotive Industry Insights Finance Market Report Q4 2020.” March 2021. https://www.experian.com/content/dam/marketing/na/automotive/quarterly- require the presence of multiple parties interacting. Understanding and creating webinars/credit-trends/2020-quarterly-trends/v2-2020-q4-state-automotive- interoperability between those parties is precisely the focus of the MOBI FSSC WG. market.pdf. The FSSC Standard leverages blockchain to provide a trust layer, where all parties Hackett, Robert. Fortune. “Ritzy Aspen Hotel Sells Real Estate on Blockchain with Indiegogo’s are able to validate each other’s identity, leveraging an immutable ledger that Help." August 2018. https://fortune.com/2018/08/23/hotel-real-estate-aspen- allows for the verification of the authenticity of data, resulting in a shared platform blockchain-ethereum-st-regis-indiegogo/. for deploying interoperable applications. Krier, Charles, and Wagener, Katharina. PayTechLaw. “eIDAS and AMLD5: A perfect match?” September 2020. https://paytechlaw.com/en/eidas-and-amld5-a-perfect-match/. The applications and use cases enabled by such a platform are precisely the focus Oxford Economics. “Infrastructure investment needs 50 countries, 7 sectors to 2040.” July of this paper. Today, each of the use cases discussed in this paper are impeded by 2017. https://www.oxfordeconomics.com/recent-releases/Global-Infrastructure- operational inefficiencies, which are all caused by the need for trust services. Outlook. Blockchains and standards created by consortia like MOBI result in a neutral environment where all the stakeholders can engage with one another on equal footing. For vehicle finance, the implications in terms of new services and operational efficiencies are manifold.

25 © 2021 MOBI — FSSC Business White Paper © 2021 MOBI — FSSC Business White Paper 26 MOBI is a nonprofit industry consortium of many of the world’s largest vehicle manufacturers, along with many startups, NGOs, transit agencies, insurers, toll road providers, smart city leaders, and technology companies working to accelerate adoption and promote standards in blockchain, distributed ledgers, and related technologies.

MOBI is creating simple blockchain-based standards to identify vehicles, people, and businesses in order to securely exchange and monetize data, and pay for mobility services, with the goal of making transportation more efficient, affordable, greener, safer, and less congested. MOBI itself is technology and ledger agnostic. For additional information about or joining MOBI, please visit our website.

dlt.MOBI @dltMOBI MOBI @dltMOBI [email protected]