Blockchain-Based Smart Contracts Approved in Arizona; Could this Technology Make it to Debt Collection?

Maybe you’ve heard the term “blockchain” but aren’t quite sure what it is. You’d be in good company. However you may want to start learning, as it just may be a technology platform that changes the ARM industry someday.

In super-simple terms, blockchain is a decentralized way of keeping track of what is “true” (i.e. who owns what, who has signed what, who has paid what, etc.). This decentralized mechanism is called a “distributed ledger” – imagine a town checkbook, but instead of living in city hall, everyone in the town has a copy of it. Each time an entry is made it must be validated by everyone with a copy, and then everyone’s copy is updated. Each update is a new “block” in the “chain,” and each block needs all the other blocks to form the whole picture. The result is said to be a highly secure, transparent, interdependent chain.

Today, most information is tracked in major centralized databases owned by one company (or government) or another. As we know, these databases are often vulnerable to hackers, they are not at all transparent, and they can be difficult to get corrected when they are wrong. This has created a lack of trust in our systems, and makes it frustrating to do business.

Blockchain was first used to manage bitcoin, the new kind of electronic currency that pretty much operates on the fringe. But many are now experimenting with a wide range of other, more mainstream uses. One example is that the State of Arizona has just passed a bill giving legal status to smart contracts and blockchain based signatures. Here’s what the bill says,

"A signature that is secured through blockchain technology is considered to be in an electronic form and to be an electronic signature.

A record or contract that is secured through blockchain technology is considered to be in an electronic form and to be an electronic record.

Smart contracts may exist in commerce. A contract relating to a transaction may not be denied legal effect, validity or enforceability solely because that contract contains a smart contract term.

For the purposes of this section:

“Blockchain technology” means distributed ledger technology that uses a distributed, decentralized, shared and replicated ledger, which may be public or private, permissioned or permissionless, or driven by tokenized crypto economics or tokenless. The data on the ledger is protected with cryptography, is immutable and auditable and provides an uncensored truth.
“Smart contract” means an event-driven program, with state, that runs on a distributed, decentralized, shared and replicated ledger and that can take custody over and instruct transfer of assets on that ledger."

insideARM Perspective

The debt collection community – including creditors, collection agencies and consumers – could benefit greatly from innovation that provides transparency and trust. Unfortunately there are many hurdles, including regulatory limitations and perceived risk by financial institutions. Blockchain may or may not prove to be the solution, but many industries and organizations – including major banks -- are in active exploration of how it might be used in their domain. In my opinion, the conditions and requirements of the debt collection ecosystem make it a perfect candidate for this type of innovation.

The iA Institute (parent of insideARM) is devoting considerable effort to the concept of innovation for the industry. In conjunction with the Consumer Relations Consortium, this week we are kicking off the first meeting of our Innovation Council – a thought leadership group of creditor, agency, and service provider executives who will gather to contemplate the future of debt collection technology.