The $1.8 trillion private credit market rests on a foundation most participants don't fully understand—and recent high-profile failures suggest that foundation may be crumbling.
When Tricolor Auto Group filed for bankruptcy last year, the immediate focus fell on the $1.1 billion in liabilities and the hundreds of millions in losses absorbed by institutional investors. Yet the bankruptcy proceedings revealed something more troubling: duplicate pledging of the same collateral at all levels of the industry. By the time the issues were discovered, capital had been deployed, loans had been tranched, and borrowers—many of them with few alternatives in the subprime space—found themselves caught in a repossession nightmare that cost them their transportation and, in many cases, their livelihoods.
This wasn't an isolated incident. It was a symptom of a deeper structural problem in how America secures and tracks commercial credit.
Our commercial lending infrastructure operates on a patchwork of 50 separate state (plus DC) filing systems under the Uniform Commercial Code. Each state maintains its own database with no real-time cross-verification mechanism. When a lender files a UCC-1 financing statement to perfect a security interest in collateral, that filing goes into a single state's system. The other states have no immediate knowledge of it.
This fragmentation creates exploitable gaps. A fraudster can pledge the same asset—whether vehicles, equipment, loans or receivables—in multiple states during the days or weeks before filings become visible. Effective due diligence can require manually searching 50 different state (plus DC) websites with inconsistent data formats and search interfaces. For lenders conducting rapid due diligence on high-volume loan portfolios, the system is slow, expensive, and prone to human error.
The result is predictable: duplicate pledging goes undetected until default, at which point multiple parties discover they have competing claims to the same collateral. Legal battles ensue, recovery values plummet, and losses cascade through the system.
Banks have responded to post-2008 capital requirements by moving lending activity off their balance sheets and into private credit markets. Assets under management in private credit funds have grown exponentially, yet the infrastructure for verifying and perfecting security interests hasn't meaningfully evolved since the 1960s.
Major financial institutions rely on the same manual due diligence processes, the same fragmented state databases, and the same delayed verification timelines that enabled the problems we're seeing today. The warehouse lenders providing capital to loan originators have every incentive to maintain the status quo—complexity justifies fees, and opacity obscures risk until it's too late.
Meanwhile, borrowers at the lower end of the credit spectrum face the worst of both worlds: predatory pricing from lenders that exploit information asymmetries, combined with a verification system so inadequate that even legitimate loans can be entangled in fraud schemes.
In 2022, the Uniform Law Commission approved UCC Article 12, establishing a legal framework for "controllable electronic records"—essentially, digital assets whose ownership can be verified through cryptographic means. The rapid adoption of this framework by the states creates an opportunity to solve the duplicate pledging problem using distributed ledger technology to create an immutable record of security interests that can be verified in real time across all jurisdictions. Instead of 50+ separate databases with no interconnection, a distributed ledger provides a single source of truth: one asset and all of its ownership interests (past and present) contained in one token.
The technical possibility has existed for years. Blockchain's consensus mechanisms prevent the creation of duplicate tokens. Smart contracts can automate verification and enforce transfer rules. The infrastructure is available today, not some distant future.
Yet adoption has been slow. Financial institutions remain skeptical of blockchain technology, associating it with cryptocurrency speculation rather than infrastructure improvement.
Regulators are cautious about approving systems they don't fully understand. And incumbent lenders have little incentive to support a technology that could disintermediate their role.
The longer we delay addressing these structural vulnerabilities, the greater the systemic risk. Private credit markets continue growing rapidly, and the volume of assets being offered to investors without adequate verification infrastructure grows with them. Each bankruptcy that exposes duplicate pledging erodes confidence, but the fundamental problem—a 1960s-era filing system trying to secure trillions in 21st-century credit—remains unaddressed.
The technology exists to solve this. Article 12 provides the legal framework. What's missing is the institutional will to implement solutions that prioritize market integrity over incumbent business models.
Banks and non-bank lenders alike should welcome systems that reduce fraud risk and improve capital efficiency. Borrowers—especially those with limited credit options—deserve a system where legitimate collateral verification doesn't leave them vulnerable to predatory practices or lender fraud.
This isn't about disruption for its own sake. It's about recognizing that a market as large and systemically important as private credit cannot continue operating on infrastructure designed for a different era. The question isn't whether technology can solve these problems—it's whether we'll implement solutions before the next Tricolor-scale failure makes the choice for us.
