The results of a behind the scenes battle brewing between blockchain technology startup Hashlynx and mega-bank Bank of America to win a patent for a distributed ledger-based technology platform could end up determining how the operational difficulties inherent in the US$2 trillion paper-intensive syndicated loans market are eliminated and by whom.
Whoever is awarded a patent first can prevent other firms from using the same technology and/or methodology. Neither Hashlynx nor Bank of America have made any public announcements about their patent applications to the US Office for Patents and Trademarks, but Bank of America’s recently published patent application was cited by an IT professional unrelated to Bank of America on Facebook as an interesting update to the world of blockchain. Hashlynx’s executives applied for the firm’s patent in December 2017, while Bank of America did so in April 2019. Hashlynx’s application was made public on July 19, 2018, while Bank of America’s was published on July 16, 2020.
Although there are numerous applications of DLT in the works in the securities industry, the processing of syndicated loan transactions is often cited as likely to benefit the most from the new technology because of the amount of manual intervention involved. Syndicated loans are tendered by institutional investors and/or banks to corporate borrowers in exchange for interest payments. Corporate borrowers hire agent banks to handle the administrative work, such as making interest payments, overseeing the paperwork that relates to each lender owning a part of the loan and transferring ownership of the loan asset. Investors wanting to trade parts of the loan with each other must also exchange assignment agreements through the agent banks.
All of the documentation required to process a syndicated loan transaction results in a long settlement cycle, so the term failed settlement doesn’t even exist. While a transaction involving equities or fixed-income securities must settle within two days after a trade is executed, a transaction involving a syndicated loan could easily take more than two weeks because of the manpower involved. Human error could easily result in the wrong interest payment or no payment at all going to the wrong lender. Using distributed ledger technology (DLT) would eliminate the manual process for settling a trade in syndicated loans or making any payments based on an immutable record of information and workflow. So far, IHS Markit’s automated ClearPar platform appears to be the industry leader in reducing the settlement cycle for syndicated loans to only a few days, yet it does not rely on DLT.
Bank of America and Hashlynx’s patent applications are among dozens involving blockchain-based technology. However, they seem to be the only ones focused on processing syndicated loan transactions. Of the two patent applications, Bank of America’s addresses only one aspect of the syndicated loans lifecycle — payments between the corporate borrower and the lenders made through agent banks of which Bank of America just happens to be one of the largest. The inventors of the device and methodology published under the name “Syndicated Loan Distributed Ledger Pass Through Processing” are listed as Lalit Dhawan, Ron Papka and Brandon Castagna with the applicant named as Bank of America. Dhawan’s Linkedin account says he is a senior vice president at Bank of America with experience in loan accounting/lending applications while Papka’s Linkedin account lists him as head of robotics, NLP and Analytics for wholesale credit and banking technology. Castagna’s Linkedin account says he is a payments and innovations technology executive at the bank.
The Bank of America invention is described as follows: apparatus and methods for utilizing distributed ledger technology to process and record syndicated loan payments are provided. An agent bank address may receive an interest payment from a borrower address (eg. interest accrued). The agent address may distribute the interest pro rata to members of a lender consortium and records the payments on the distributed electronic ledger. The distributed electronic ledger may provide and maintain a shared source of truth for event details associated with a syndicated loan facility agreement and utilizations (loans) may be represented on the electronic ledger as smart contracts. As events occur, a corresponding record of each event is anchored to the facility utilization smart contract, creating a chronological audit trail of all activity associated with the syndicated loan.
Hashlynx’s application is far more general in nature than Bank of America’s, but its potential use in the syndicated loans market is mentioned and Hashlynx’s website clearly indicates the firm take a “holistic approach” to syndicated loans by solving many pain points of processing transactions. Among the functions the firm’s DLT platform offers are: matching of the details of syndicated loan transactions for close to real-time settlement, a know-your-customer registry, and payment and transfer of funds. The inventors of Hashlynx’s invention, listed as Paul Zappier and his son Nicholas Zappier, cite Hashlynx as the assignee which means that if their patent application is approved, the patent will belong to Hashlynx. Paul Zappier is the president and chief technology officer for Hashlynx and Nicholas Zappier is the director of architecture. Filed in late December 2017, the patent application was published a few months after Hashlynx was launched by Zappier and Pat Loret de Mola, its chief executive who was previously chief executive of Trade Settlement, the operator of a syndicated loans processing platform purchased by Virtus LLC. Paul Zappier lays claim to having been the original creator of the ClearPar platform. which IHS Markit enhanced after its purchase from Fidelity Information Systems in 2011.
According to Zappier’s application, Hashlynx’s invention is about a system for using one or more decentralized applications to allow entities to interface with a blockchain for the purpose of conducting a “resource transfer.” As the application explains, typically the blockchain is a permissioned blockchain which may be accessed only by the entities involved in the “resource transfer.” The decentralized applications may communicate with the legacy systems within each entity through an application programming interface (API) such that the data stored on the legacy systems may be governed by the blockchain. This enables the authenticity of the data stored in the legacy systems while preventing the possibility of disparate versions of data created over time. Zappier’s patent application cites loan settlement as one type of resource transfer that the invention can help solve. The blockchain can be used to store various financial records, loan settlement documents, “know your customer” (KYC) documents, upstream trade documents and other documents necessary to facilitate loan settlement. By storing the documentation, counterparties don’t have to scramble to track down the necessary paperwork and can be assured that the data on the blockchain represents an “immutable record” of the information necessary for settlement.
Who will win the race for the patent covering syndicated loans processing will depend on multiple factors, according to patent attorneys who agreed to speak in general terms and not about specific patent applications. “The invention must be novel, which means that it cannot be obvious or simply repackage details found in the public domain at the time the patent was filed,” explains Gregory Ewing, a partner at Potomac Law Group in Washington DC specializing in intellectual property litigation. “The fact that a patent may encompass a broader set of tasks does not necessarily have any bearing on the patent office’s decision whether or not to grant a patent. However, if both patents are granted, what does matter is who filed for the patent first.” That means Hashlynx could be in a stronger position than Bank of America to protect its patent from infringement.
What happens if either firm wins a patent? The firm receiving the patent could sent a cease and desist letter to any other firm it suspects is using the invention protected by its patent or simply sue for patent infringement without warning. However, patents can be challenged either through or outside of litigation. “A company accused of patent infringement will typically counter by arguing the patent is invalid or ask either the court or the patent office to make that finding,” says Patrick Muffo, a partner in the law firm of Seyfarth Shaw in Chicago. “The patent office may also find some but not all of the patent claims invalid, meaning the patent is wounded, but not necessarily dead.”
For smaller startups, such as Hashlynx, enforcing a patent through litigation can be almost impossible if it doesn’t have deep pockets. Smaller firms would need to either find an attorney willing to take on a patent infringement case on a contingency basis — only earning a fee if it wins the case– or a patent litigation financing firm which would also earning its keep if the firm suing is successful. Either pick is a long shot for a start-up firm. Its best hope would be to settle with the infringing company to license its technology or even buy its technology outright. Hashlynx executives confirmed their firm’s platform has “interested parties,” but no paying users. They declined to comment on what Hashlynx would do in the event of a patent infringement if it were to receive a patent, or what it would do if Bank of America were to receive a patent. Bank of America certainly has enough money to fight any patent infringement on its technology, but some syndicated loan operations specialists speculate that Hashlynx is counting on Bank of America to agree to a technology partnership as their inventions appear to be complementary.
It is uncertain what effect, if any, the approval of either Bank of America or Hashlynx’s patent applications will have on the fate of Synaps Loans, a blockchain-based joint venture launched by Ipreo and Symbiont in 2016. A Delaware’s Chancery Court in December will hear arguments involving a lawsuit filed against Ipreo and its new owner IHS Markit by New York-based blockchain technology company Symbiont last year seeking financial damages in a jury trial for breach of contract and wilfull misconduct after IHS Markit bought Ipreo in 2018. IHS Markit has countersued Symbiont. Synaps Loans, which never went live, relies on DLT and smart contracts to reduce the settlement time for syndicated loans.
A spokesman for IHS Markit says that his firm has incorporated Ipreo’s technology within the firm’s financial services division. However, it is not clear how or whether IHS Markit has integrated Synaps Loans’ technology within IHS Markit’s ClearPar. Synaps Loans had previously cited Credit Suisse, Barclays and US Bank as agent bank promoters with Alliance Bernstein, Eaton Vance, KKR and Oak Hill Advisors as buy-side backers. IHS Markit’s spokesman would not disclose the number of clients, if any, now using Synaps Loans or ClearPar. He would also not discuss the potential effect on Synaps Loans if either Bank of America or Hashlynx wins a patent. Symbiont would not comment on the litigation or on the ramifications of any patent wins on Synaps Loans.
Regardless of who wins a patent for its invention first, Bank of America and Hashlynx’s efforts offer plenty of evidence there must be lots of money to be made improving the processing of syndicated loan transactions. Whether or not the answer is blockchain-based remains to be seen. So far, IHS Markit has limited its use of blockchain to a new application designed for settlement finality or the movement of cash in exchange for the transfer of ownership of a loan asset. IHS Markit’s spokesman would not comment on whether the new application, based on the JP Morgan-developed Quorum technology, has been integrated into ClearPar. The New York-based Ethereum venture studio ConsenSys has just acquired Quorum.
The New York and London-based fintech firm Finastra, which in 2018 announced a new FusionLenderComm platform based on DLT, now tells FinOps Report that in 2019 it switched decided the platform should be on the cloud instead to allow for easier deployment and cost savings to agent banks. Finastra, which is still working on the new architectural underpinning, had previously named BNY Mellon, Credit Suisse, HSBC, State Street and ING as supporters. FusionLender Comm allows agent banks in the syndicated loans market to post lender-specific deal information on the platform so lenders don’t have to email, fax, or call up an agent bank for transaction history. London-headquartered fintech firm Semantic Evolution says that it has designed machine-learning based software to extract and store data on syndicated loans from PDFs and faxes. The extraction model has undergone two proofs of concept, according to the company, which is looking for a partner to deploy it at scale.