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Tuesday, May 18, 2021

Need a Neutral Third Party That Can Really Be Trusted? Try Blockchain

By Jason Nadeau
August 16, 2017

Topics:
Mortgage Technology
Blockchain
Jason Nadeau


Jason Nadeau is Executive Vice President of Factom, Inc., Austin, Texas. He works with Factom to lead the strategy for the mortgage industry including revenue growth, strategic partnerships and business development strategy.

When it comes to sensitive business transactions, trust is a huge issue. Whether you're talking about mortgage lending, tax auditing or completing a merger, all participants in the business ecosystem need a way to gain unshakeable trust in order to execute transactions successfully.

This can be quite challenging when it comes to collaboration that involves confidential documentation. From what I've observed firsthand in the mortgage industry, it's common for the stakeholders involved in mortgage-related transactions to have a difficult time with trust when it involves other people or third-party entities--both of which are fallible-having access to customers' personal and financial data. It's for good reason, too, since issues relating to data security and privacy continue to make headlines.

Fraud, misaligned incentives, negligence and vulnerability to hacking and data breaches have significantly increased our levels of mistrust or discomfort with reliance upon other parties to transactions. The missing piece in the transaction is a trustworthy intermediary, and this is neither a person nor a company, but a relatively new technology called blockchain.

A Secure Solution Is Born
To understand why blockchain succeeds as a trusted third party where others fail, some history is in order. Back in 2008, under the pseudonym Satoshi Nakamoto, the technology for Bitcoin was created, a digital currency whose goal was to eliminate the third-party intermediaries involved in payment processing. By having an unregulated "cryptocurrency" that could bypass federal currency controls and the need for a bank, online transactions could be simplified. But security needed to be ensured for these fund transfers as well. So Nakamoto devised a blockchain database as the technology that could securely underpin Bitcoin transactions without the need for a bank, company or other business in the middle.

But why is blockchain more trustworthy than your colleague, a bank employee or even the bank itself? The reason is that by design, any transaction record added to the blockchain can never be tampered with or changed--it becomes immutable. That's not something you can say about any other third-party entity, human or corporate. This is also why blockchain's applicability for other industries--including mortgage--was soon discovered. No longer just for Bitcoin, blockchain-based systems can help safeguard all kinds of information, offering a level of trust for document collaboration that was previously unavailable.

Get It From the Librarian
To better visualize how blockchain technology actually does its job, I've found that it helps to think of blockchain acting like a librarian. Instead of going directly to the source of information and grabbing it right off the shelf like you would grab a library book, with blockchain you instead go to this third-party librarian who basically holds a copy of the book (or your document) for you. Then when the librarian goes to grab a new copy of the publication, this helper compares it against the last version and verifies, "Yes, nothing has changed, here you go!" and gives it to you again.

While you might visualize blockchain as a librarian, though, what's nice about the technology is that it becomes the trusted third party that businesses needed--without needing to share confidential documentation with another person or outside entity. It's trustworthy because once you know that a document has been registered using blockchain, then you have complete assurance that the information can't be changed.

Here's how blockchain technology can create a secure third party: let's say that a mortgage lender wants to publish a confidential document to a title company. The document contains a homebuyer's financial information. The lender feeds the document to a blockchain-based system, which generates a cryptographic proof of the document. The lender then publishes a key, which is like an ID number, along with the cryptographic proof and puts it into an unchangeable database. The system stores that cryptographic proof in the blockchain's immutable ledger, which while public to everyone involved in the transaction, can never be changed. So every time the lender gives the title company a link to this confidential document along with its key on the blockchain, the title company can retrieve the document and compare it to what is registered on the blockchain, providing proof that the two keys match and that the document has never been changed. Voila, your third-party "librarian" has taken care of the job!

Changing the Way Business Gets Done
In the mortgage industry and beyond, many companies have tried to create collaboration tools to essentially "sit in the middle" and collaborate between parties, but these haven't been successfully embraced by the industry. Most people involved in these types of transactions understandably don't want to give a corporate third party access to all of their information and documents. Their goal is to restrict access to this type of sensitive data, so that only the few who actually need it to complete the transaction receive it. To bring a third party into business transactions in the mortgage industry, has been problematic.

Blockchain solves this problem by giving the participants involved in a transaction a neutral third party in the form of a technology instead of a person or additional business entity. The very neutrality of blockchain as a third party changes the willingness of those involved to provide the information and complete the transaction. By offering an innovative solution for securely storing information in a way that all stakeholders in a transaction can trust and ensure is unaltered--without needing to involve an actual third party--blockchain is poised to change the way that entire industries do business.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)

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