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The Schuldschein and Blockchain-Powered Transactions

A major German automaker and a group of banks have become the latest large corporations to embrace blockchains on a large scale, to the tune of 100 million euros.

A loan worth $114 million, which was announced last month, was issued via blockchain technology to Daimler AG, a German automaker, by the Landesbank Baden-Württemberg (LBBW), a major banking company also based in Germany. Several other German banks participated in the deal as lenders. The deal brings blockchain technology one step closer to widespread embrace by large, established companies. It also shows how banks are looking toward blockchains to improve and streamline conventional lending practices.

The loan took the form of a Schuldschein, a special type of loan with a long history in Germany. Schuldschein loans, which are based on simple contracts, are subject to fewer regulations and formal definitions than other types of lending instruments common in the finance industry. The more flexible nature of the loan perhaps helped the participants to work more easily around regulatory requirements that can sometimes make blockchain-based transactions difficult because the rules were written before the advent of the technology.

Blockchains’ Role

The Schuldschein is notable as one of the first large blockchain-based loans issued by a mainstream financial services company to a publicly-traded business.

According to Daimler’s announcement, “the entire transaction — from the origination, distribution, allocation and execution of the Schuldschein loan agreement to the confirmation of repayment and of interest payments — was digitally carried out via blockchain technology.”

Daimler and LBBW have been coy in revealing the technical details of the blockchain technology they used. Based on the information that the companies released, the loan appears to have been instrumented using internal IT resources. It’s not clear if public blockchain-based cryptocurrencies such as bitcoin or ether powered the deal, or whether the companies developed their own blockchain for the purposes of the transaction.

The Schuldschein’s Significance

The importance of Daimler’s blockchain-based loan should not be overstated but the scope and impact of the deal are limited in some key ways.

For one, the companies present the loan as a pilot project for testing blockchain technology, rather than the first in a series of major blockchain-based loans. It’s unclear how they will measure the effectiveness of the experiment, or what they might attempt to do next using blockchain. In a statement about the loan, they reported that they are also conducting “other projects to determine where blockchains could also be used to increase efficiency and support our business models,” but they offered few specifics.

The private nature of the deal also constrains its significance. One of the core values and unique features of blockchain technology is its ability to sustain totally decentralized transactions in which anyone, anywhere can participate. The Daimler/LBBW Schuldschein did not take advantage of this feature; instead, the deal took place between two private parties that presumably orchestrated it in a centralized way.

It’s worth noting, too, that the transaction involved only companies based in Germany and was conducted using a loosely-regulated type of lending instrument, the Schuldschein. For these reasons, the deal does little to highlight blockchain’s ability to cross borders freely — another key selling point for blockchain technology in the financial services industry.

And because the loan was not subjected to traditional regulatory oversight, it does not help to dispel anxieties about regulatory issues that companies may face when they use blockchains.

Nonetheless, the deal does matter. It involved quite a significant amount of money, even by the standards of major corporations. It demonstrates the flexibility of blockchain technology, which Daimler and LBBW apparently used to implement a custom lending solution. And the companies promise that it’s only one of several ongoing experiments with blockchain technology that are aimed to delivering true innovation for their everyday business practices.

This is not quite a revolutionary event, but it’s an important step toward widespread blockchain adoption by established entities in the financial services industry.

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