Loraine Lawson
Good day and welcome to The Buzz, a Bank Automation News podcast. I’m Deputy Editor Loraine Lawson. In today’s episode, we’re joined by Joe Dewey, a financial services and technology attorney at the international law firm of Holland & Knight. He’s also a software developer and co-author of The Blockchain: A Guide for Legal and Business Professionals. This past year, Dewey worked to help automate documents at Locality Bank, a digital-first community bank based out of Fort Lauderdale, Florida. The automation uses structured data from Excel or CVS files and maps that to the document templates to create customized and accurate documentation, thus reducing errors. In this podcast, I asked Dewey whether there are potential legal problems to watch out for when automating documents.

Joe Dewey
So, yeah, I mean, sure, right, I mean, it but they’re, in some of them aren’t necessarily unique to document automation. They could be, they could be risks, anytime you’re kind of generating standard documents. You know, and that could range from, you know, regulatory issues or or enforceability issues around, we we get an include certain, you know, required statutory disclosures or language in this type of document, because, you know, which was required for that product type. Because we, we started with a base that was a different type of product type, and we’re conforming it, and somebody missed the fact that we needed these, these required disclosures, or something like that, but again, that’s a risk that’s kind of inherent in, in generating, you know, the, the doctors now, I will say, you know, a lot of institutions probably use already have some kind of automation document tools like laser Pro, or other commercially available software that they might use for certain types of loans. And, at a certain below a certain dollar amount or loan size. And particularly for loan products that are very straightforward, like unsecured business lines, that software probably is perfectly fine for them. Where where we see the need, or where we see an area of improvement is really that part of the of the loans offerings that either get larger in size, where you don’t want to rely on just internally generated docs from a you know, laser Pro, or the complexity of the deals are such that they don’t fit within the boxes that that you get are the parameters from an out of the box solution like laser Pro. And, and so that’s where we’re focusing, you know, our efforts is, again, stuff that is a little bit either too big or too complex. To be appropriate for those other types of solutions. But, yeah, I mean, the thing I would add is, you should expect that the development of the templates in this process will be somewhat of an iterative effort. And you should be, you know, constantly doing quality control checks, you know, looking for the errors that undoubtedly might, you know, get introduced somewhere and correcting those, I do think you, you don’t want to just take, you know, have an effort, put the templates together, go live and not be looking at in queue, seeing some of the output, particularly early on. Because just like any process, there’s almost always the if not errs things that could be improved. And so I think you want to constantly be evaluating the output in the process to see if there’s ways to improve it.

Loraine Lawson
I should say here, that Locality bank is offering services such as commercial banking, commercial real estate lending, SBA lending, this deposit and business Treasury services. And they hope to offer that through a mobile app, correct? Yeah, that’s correct. Are there are other contracts or deal, these sort of deals that are just not automatable, that things should not automate?

Joe Dewey
You know, there’s probably there’s probably a I’m a believer that there’s there’s some level of automation is probably could add value to just about any type of product. In terms of fully automating a set of documents. There, there are certainly products that might get very bespoke, you know, are very complicated. You know, you might have very large multi lender, syndicated transactions, where maybe it may be challenging to come up with standardized templates, or, you know, things that might be very industry specific deals where you just, it’s not possible to have all the types of provisions that might be relevant to a given industry. In other words, like one day might be financing data centers, and you’d want certain provisions in there around, you know, data centers, versus healthcare company, where you might have a whole different set of like, regulatory type provisions. And now I would, I would, by and large, I think those types of scenarios are going to be most commonly encountered at your very large institutions that are doing larger syndicated transactions. But that said, I mean, they’re, they’re even at the, you know, the community bank level with smaller loan loan types, you know, you very well made from time to time come across a particular borrower that in particular industry, that is going to raise issues that aren’t baked into your automation solution, which, again, I talked about automating the initial drafts of documents, because ultimately, those documents may need to be modified by, you know, a human to account for those types of things, some of which you may not learn until you actually get into the diligence process with the borrower, or as issues come up that need to be addressed in the documents. So that, you know, again, so I think for most loan product types, there’s there’s a way to generate, you know, very close final documents in terms of initial drafts. But even in those you have to be you have to be aware of the issues that might come up that require revisions to those documents before it ultimately closes.

Loraine Lawson
I understand you also do work with blockchain and distributed ledger technology. Is that correct? Yes. Yes. So I wondered what you see if anything banks doing with that technology so far.

Joe Dewey
So it’s interesting. There’s, I guess, two ways to look at that. Right. There’s How are banks, leveraging the technology from an infrastructure standpoint, an operations standpoint, as well as banks that are taking their where they’re, they’re leveraging the opportunities that that industry might provide to them in terms of customers and loan types and things like that. In terms of the infrastructure, you know, there are some, I’d say the larger banks, like JP Morgan, is a great example, have invested huge sums of money on studying the technology and developing some of the technology. There’s our three, which is a consortium of financial institutions that, that are working on technology related to blockchain and financial institutions. You know, the LSTA, which the loan syndication trading association, which is comprised, you know, by a lot of luck, Wall Street banks, among others, is constantly educating their members on the technology in terms of actually deployed in the wild, you know, instances of usage. Very few. And there’s a, I think, a host of reasons for that, you know, you got to everyone’s got to come to agreement on standards. I mean, first, you got to pick which blockchain to the extent you’re going to have, you know, multiple institutions leveraging the singular network. People have to agree on things as simple as how do we format our data, right, because right now, most, those financial institutions have all their loan data in some particular format in their system. And it doesn’t necessarily talk with anybody else’s system. And that’s normally Okay, right. But if you want to have a blockchain, people are gonna have to convert or integrate those data formats across the entire industry, which is, which is a very tedious task, there’s been talk of, and I think there are opportunities to use of technology and AML KYC efforts in that context, and dating back as far as three or four years ago, you know, there were pilots in Canada, leveraging the technology with the handful of Canadian banks to try to have a system where, you know, if you were vetted from a KYC standpoint, with one institution, you’d be pretty much good to go with all the other institutions that were participating in that in that on that network. But again, you know, there really aren’t any large scale deployments of systems like that. In terms of, you know, client or business opportunities. You know, there are now a number of exchanges like Coinbase, Gemini block phi, that are built multi billion dollar operations that need banking. And, you know, one of the major banks that provide services to that industry is silvergate Bank, in San Diego. And we actually are a client of the firm and, and so that, that creates, they have unique products, lending against Bitcoin and things like that. But I think a lot of institutions have been historically had been hesitant to onboard customers in that space. Largely, they because it creates heightened risks around BSA and AML. Particularly if you’re dealing with exchanges that are money, there, they are money transmitters and, and heavily regulated institutions. But I think, by our my guess, is that many, many financial institutions today are probably becoming much less hesitant to engage in onboarding those types of customers, given that crypto is is, is entering the mainstream, right. I mean, today, you’ve got CME issue, you know, options and futures and they’re, you know, ETFs Coinbase, has publicly traded, you know, as, as even Fidelity has, you know, fidelity digital assets. So, as these as these as that asset classes become mainstream. I think you’ll see more and more financial institutions being willing to, to engage with customers in that in that business. But in terms of, again, the banks using the technology

you do have, I think, a lot of pockets of Reese rd and people that are focused on on those, those issues. But, you know, not a lot of like in production deployments at this point, at least, that I’m aware of. Now,

Loraine Lawson
one of the opportunities that blockchain affords me everyone I guess, as smart contracts. What opportunities do you see for smart contracts when it comes to financial institutions or what drawbacks are there

Joe Dewey
Yeah, so I think there’s, there’s, there’s a number of them, right? I mean, there’s you could envision things like, you know, letters of credit that are there based on smart contracts where, you know, the whole presentation process, you know, could be done automatically, I mean, think of a sort of a standby letter of credit or merchant Letter of Credit where, you know, condition to payment is the goods reach a certain port or destination. You know, you could have a system that when those goods are scanned, or your somehow there’s a digital confirmation of receipt, that that, that gets fed into a blockchain that automatically, you know, require that effectively causes the payment transfer to occur. Now, some of that, again, traditionally has been, there’s been limitations around your ability to actually settle or pay on the blockchain, right? I mean, you could, you could, you could, you could affect transactions, but actual settlement and payment needed, it needs to occur off chain, because the US Dollars are on the blockchain, and our fee, that’s a different payment rail. That’s been changing or with the, with the introduction of stable coins, particularly, you know, Fiat, or, you know, other Treasury at, you know, bat stable coins. Where, if you, and you see, there’s usdt, the Facebook back dem coin is one that is garnered a lot of attention. And those would offer opportunities for people to actually affect settlement. To the extent that people are just as comfortable as taking that digital representation of the US dollar, because they know it’s backed by, you know, either us cash reserves or or, or say short term US Treasuries. Now, you could actually affect the settlement payment via a smart contract on a blockchain. And to the extent you needed to convert the stable coins back to fiat, that you would have the the comfort, the the security to know that it was backed by something, and and specifically pegged to a particular currency. So you avoid the potential volatility, which I should, I should, should have probably qualified at the beginning, you could settle smart contracts. But you need to do it in a in a in a virtual currency, like ether or something like that, which is traditionally been fairly volatile. And you know, that that poses a lot of Counterparty a lot of risks that many counterparties may not want to take. But stable points offer a potential ability to avoid that. So and, again, that that has, you know, that could have significant implications for trade finance, you know, across the globe, there probably some legal issues that still need to get worked out around the documents under the UCC and other conventions, but all things that are very solvable. So yeah, I think I think there are opportunities, again, my guess is you’ll see, you know, the banks that are at the forefront of working with institutions in the virtual currency space, probably will have will be more active in this space initially. But, you know, but again, I think, over time, you’ll see it, usage expand to other institutions. Again, the biggest issue I see is coming to is getting the uniformity around the systems that you need. And with, you know, four or 5000 banks just in the United States alone. Yeah, that can be that can be problematic.

Loraine Lawson
It always seems to come back to the data problem.

Joe Dewey
Yeah. Yeah. It’s a huge Yeah, it’s a huge issue. But again, there’s, there are, you know, I go back to the AML kind of VSA stuff because I think that is an area where these systems offer the potential for actually being better systems, because right now, you know, one of the challenges financial institutions can’t disclose customer information to other financial institutions, not without their customers consent. And so banks doing AML surveillance are largely You know, they see kind of a narrow window of transactions, they can’t see the whole picture throughout the system. And so people who are engaged in the various for illicit activity can take advantage of that. But if you had, you know, some kind of distributed ledger system or blockchain technology that would effectively allow, you know, the system to see the big picture without necessarily disclosing it, you know, infer customer information to other institutions, but rather just kind of flagged hits for the appropriate people to look at whether that’s a regulator or maybe just the institution who banks that customer. You know, that would that could potentially improve how well we’re able to, to, to try to eliminate those kinds of financial crimes. It could potentially also have a very big cost savings for some institutions, because our current system requires all of those four or 5000 banks to have their own compliance department, their own AML surveillance systems, there’s there’s no mutualization of that effort, even though they’re they’re largely all engaged in with the same goal in mind. And one just has to think that there’s a there is an opportunity to neutralize some of that cost across the banking industry. And push overall compliance costs down for everybody. But again, to your point, I mean, it’s the data, right? I mean, every not everybody. There’s so many different formats and in database structures and ways that institutions can store data that it can sometimes seem insurmountable to come up with a set of protocols or standards that that will allow all that information to be usable by others.

Loraine Lawson
You’ve been listening to the Buzz, a Bank Automation News podcast. Thank you for your time and be sure to visit us at BankAutomationNews.com for more automation news. You can also follow us on Twitter and LinkedIn. Please don’t hesitate to rate this podcast on your podcast platform of choice.