A group batch of loans, structured as HELOCs, have successfully been securitized and issued as bonds to investors on Provenance, by a group of enterprising companies. This process saw $150 million worth of these asset-backed loans undergo the process, entirely with the use of blockchain.
Figure Technologies, who spearheaded the endeavour, believes that this is the first example of bonds being issued solely through the use of blockchain.
While this endeavour may have been spearheaded by Figure Technologies, they are not the only ones that played a role. The following companies each took part in the securitization in varying capacities:
- Jeffries Group
- Nomura Securities
- Tilden Park Capital
The blockchain that made this securitization possible is known as Provenance. When describing the benefits of their platform, the company states,
“The distributed, trustless and immutable characteristics of blockchain eliminate costs from intermediaries, automate inefficient operational processes, reduce risk through data reliability, and enable innovative new products.”
While Provenance began life as a product of Figure Technologies, the company underwent emancipation in 2019. This occurred upon completion of a lucrative, and successful, STO, which saw the company generate $20 million in investments.
Since this event, Provenance has made it clear that a focus of theirs would be to change the way real estate is managed. At the time of their STO coming to a close, they indicated a desire to be the first at achieving the following:
- hedge fund on a blockchain
- real estate title entirely on blockchain
- digital mortgage on blockchain
Clearly, today’s news of the securitization of a group of HELOCs is right up their alley.
Upon announcing the successful completion of the securitization, representatives from multiple of the participating companies took their time to comment. The following is what each had to say on the matter.
Mike Cagney, CEO of Figure, stated,
“Blockchain has an almost incalculable potential for unlocking value for the world’s financial markets and we’re spearheading that transformation by taking on the big challenges like securitization…Until now, the industry has been slow to move past white papers and proof of concept projects. But this first ever production-level blockchain ABS achievement importantly underscores that the times are changing.”
Sanil Patel, Managing Director of Nomura Securities International, stated,
“Nomura is proud to have been a lead underwriter on Figure’s inaugural securitization on Provenance…Provenance is leading the way toward creating a more accessible securitization market, one where smaller issuers may securitize assets at a lower cost than the traditional model.”
Brian McGrath, Managing Director of Jefferies Group, stated,
“We are happy to partner with Provenance to bring to market a deal that meets the needs of our clients utilizing their innovative technology.”
Founded in 2018, Figure maintains operations in San Francisco, California. Above all, the company is looking to leverage blockchain and DLT, in an effort to transform FinTech. Today’s discussion is an example of this implementation.
CEO, Mike Cagney, oversees company operations.
A ‘HELOC’ simply refers to a home equity line of credit. These are essentially credit lines which allow one to leverage equity in their home for financial flexibility – essentially an asset backed loan. While standards for qualification may differ, depending on the region, the concept remains the same.
To date, many remain wary of HELOCs. While they can provide great benefits when used correctly, they are not without their risks. During the housing crisis, roughly 10 years ago, HELOC based bonds were of great popularity. When the market collapsed, many were left owing more on their homes than they were worth. As a result, there was a simultaneous collapse of the associated bonds.
HELOC backed bonds fell out of fashion for multiple years, but have recently seen a resurgence.
In Others News
If the idea of merging blockchain and DLT with bonds sounds familiar to you, it may be, in part, due to the following instances. Over the past year, a variety of banks have seen the merit behind this infusion of technology, and have done their best to trial it. Make sure to peruse the following articles to learn more about how banks around the world are faring.
Thai Government to Use Blockchain in Bond Issuance
Another minor, but significant development in digital securitization is unfolding in Thailand, where the public debt management office (PDMO) is set to issue government saving bonds that will be distributed with the help of blockchain.
This is an initial trial done by PDMO, which is part of the country’s finance ministry, to leverage the blockchain technology in issuing and distributing government bonds to the public.
According to local reports, the office is issuing bonds in total value of around $6.5 million (200 million baht). One particular feature of the blockchain technology is already clearly visible, as the bonds are being sold at a face value of 1 baht – the lowest ever amount for government bonds, which are usually priced at 1,000 baht.
Why is Bond Tokenization Important
The bond market is one of the oldest and most relied-upon asset classes, providing key financing for governments, corporations, and investors. Despite the market’s popularity with both institutional and retail investors, digitization has been incredibly slow.
Bond issuance is generally a long process that involves multiple intermediaries, incurring high costs and the risk of human error. These are common pain points in the financial securities market that technological innovations are hoping to solve.
This is where bond tokenization comes into play with the aim to lower the various costs associated with bond issuance. The application of blockchain technology can benefit the bond market as a whole by enhancing data visibility, reducing counterparty risk, and improving operational efficiency.
When buying and selling bonds, buyers can instantly verify that the sellers own the bond by looking at the blockchain. This also immediately eliminates the need of having intermediaries since the bond lives on a trustless and immutable ledger.
Blockchain also eases the process of bond issuance with the terms and conditions including the principal amount, coupon rate, and maturity date, being ingrained into code. As a result, the payment process can be automated: issuers can distribute interest payments directly to the bondholder’s wallet address.
With the novel technology, issuers of securities have the possibility to represent financial assets as granular as necessary. Since verifications, transactions and settlements take place on a blockchain ledger, there is no additional hassle or paperwork to go through, compared to traditional methods of asset securitization and distribution.
This is a huge advantage technology provides and general director of the PDMO Patricia Mongkhonvanit, recognizes that this will also open up new opportunities for everyone to buy government bonds:
“This should enable more people at the grassroots level to buy the government’s saving bonds,”
Thailand Pressing Forward with Digital Securitization
The government savings bonds will be available for purchase through the Krung Thai Bank’s (KTB) blockchain platform, which is wholly state-owned and the distribution will take place through an e-wallet. While this is an entirely novel way of conducting a government bond issuance, it is not an unfamiliar experience for many.
If the smallest bond partition is 1 baht, the minimum acquiring limit is set at 100 bonds per purchaser, with investment capped at 500,000 baht – according to PDMO.
The initial rollout will take place through digital channels, but PDMO also plans to broaden savings bond distribution channels to bank branches, ATMs and mobile banking.
In order to gauge public interest and spread the message, the government had beforehand let people subscribe through the blockchain-based e-wallet. The 200-million-baht savings bond offering is an initial test and those who are interested in participating must have accounts at KTB and apply through the bank’s e-wallet.
Thailand’s PDMO had recently closed the sales of savings bonds worth 50 billion baht, which was part of the government’s 1-trillion-baht plan to mitigate the economic damage following the COVID-19 pandemic.
The rising interest on the side of the Thai government to pursue more efficient ways for issuing bonds is further confirmation that the role of blockchain technology for digital asset securitization is broadening. Should the trial issuance on the blockchain be viewed as a success, there is a chance to see more government bonds being distributed this way.
Thailand has also been one of the countries eager to step forward with their experimentation of blockchains for financial securitization. For instance, back in 2019 the Thailand Bond Market Association announced it would adopt blockchain for bond registration. The local Toyota Leasing in the country had issued a blockchain bond. In addition to that, the stock exchange also has plans to launch a blockchain-based digital asset platform.
France’s Central Bank Completes Security Issuance with Digital Euros
The acceptance of a digital currency on a global or even on a national level was perennially viewed as a pipedream. Nonetheless, even after dismissing the biggest digital currency in the world – Bitcoin – nation states and central banks started to pay more attention and work on their own currency’s digital version.
While several countries have made some progress, China is known to be at the most advanced stage for launching its own CBDC. At the same time, news of a successful test for a digital Euro comes from France’s central bank.
Banque de France Unveils CBDC Progress
This first successful test was done in partnership with one of France’s biggest banks – Société Générale. In what is called a covered bond issuance, the total value reaches the €40 million (~$44 million) mark.
This becomes a noteworthy milestone for digital security issuance, since the transaction was instantly settled via the delivery versus payment (DvP) method directly against digital Euros.
Société Générale has lauded the results of the test and is highly optimistic in regards to the benefits digital currencies can bring, saying “It paves the way for the automation and shortening of payment processes, with simplified market infrastructures and strengthened security.”
According to reports, the central bank digital currency is one to be used for interbank settlements, rather than consumer payments. With the positive outcome of this initial test, Société Générale is encouraged to undergo more rigorous testing in the coming weeks:
“This experimentation was performed end-to-end using blockchain infrastructures…It demonstrates the feasibility of financial securities being digitally settled and delivered in Central Bank Digital Currency (CBDC) for interbank settlements,” stated Societe Generale.
This also becomes a huge milestone for the Banque de France. The central bank’s ambition to test a digital currency was voiced late last year in December 2019, stemming from a political will to take on a leadership role within the European Union.
France’s Efforts on a Digital Euro Paying Dividends
The development activity and the encouraging test results around the digital Euro coming from Banque de France are cementing the country’s place at the forefront of digital financial securities landscape.
Banque de France said it will continue to do more tests with other financial institutions over the next few weeks, as part of its ongoing exploration of a digital Euro.
“The results of these experiments will be an important element of the Banque de France’s contribution to the more global reflection led by the Eurosystem on the interest of [a CBDC],” stated the central bank.
It’s not too long ago that the central bank launched its digital Euro programme. In April, the central bank said it aims to uncover the benefits of digital currencies for clearing and settlement of tokenized financial assets.
The central bank shared that since the programme launch, there have been a lot of applications and interest to test the central bank digital currency, emphasizing the leading role the country has in payments technology innovation.
This current iteration of the central bank digital currency is being earmarked to be used for and by financial institutions – not retail payments. At the time of the programme launch, the central bank said it is not looking to replace coins and banknotes.
According to the central bank’s governor, the consumer side would have to be complemented by a different digital currency that focuses on usability and may not be underpinned by blockchain technology.
The Race for the First Central Bank Digital Currency
France is not the only country to have started testing central bank digital currencies. Last month, China finally confirmed it had begun testing its digital Yuan in four cities. According to the People’s Bank of China it started researching CBDCs as far as 2014, and finalized a basic design back in January.
If governments were adamant of adopting a digital currency, now it seems central banks are racing to be the first-to-market. It’s not surprising as well, since a successful digital currency issued by a major central bank could be used as an international currency – potentially weakening the role of existing currencies, like the U.S. dollar.
Monetary experts have voiced their thoughts that a digital asset used on a global scale could significantly reduce the influence of the U.S. dollar on global trade and weaken its position as a world reserve currency.
Whether this will come from a digital currency built by a central bank or from a neutral digital asset like Bitcoin, it’s clear that the world of financial securities is set to go through a seismic change.
NRI Issues First Japanese Tokenized Bond
This week, the IT service provider and consultancy company, Nomura Research Institute (NRI) became the first platform to offer blockchain-based digital bonds directly to Japanese investors. The news falls-in-line with the group’s overall goal to expand tokenization efforts in the Japanese market.
Specifically, NRI issued two bonds. The first bond was a 25M yen ($232,000) bond with a three-month maturity. Interestingly, this bond differs from traditional bonds in that there is no interest paid to holders. Instead, these “digital asset bonds” pay redeemable points. Importantly, the second bond does pay holders a low-interest rate. This bond saw a 5M yen issuance.
The Nomura Group Makes it Happen
In order to bring this important milestone to the Japanese market, NRI utilized multiple partnerships within its sphere. Specifically, Nomura Securities acted as the underwriter for the tokenized bonds. Additionally, BOOSTRY is the registry agent for the issuance. Importantly, last year NRI and Nomura created BOOSTRY as part of a joint venture. Interestingly, the firms started the BOOSTRY project back in 2015.
BOOSTRY’s goal was to develop a blockchain platform for the exchange of securities. The tokenized asset platform under creation – ibet is to provide more efficiency, liquidity, and security to the market. Notably, the BOOSTRY project began with an $11M capital investment. Currently, Nomura has a 6% stake in the firm, while NRI holds a 34% share.
Nomura Crypto – NRI
The Nomura group continues to expand into the blockchain sector in a major way. In Q1, the Nomura Research created a cryptocurrency index to service the growing market demand. This month also saw the Nomura Institute of Capital Markets Research create a department specifically focused on blockchain financial instruments such as security token offerings (STO).
The goal of the group is to gather issuers, asset managers, settlement agencies, legal experts, and academics to focus on blockchain integration and its effects on the market. The group currently consists of some heavy hitters in the sector including
- Tokio Marine & Nichido Fire Insurance
- Nishimura & Asahi
- Mori & Tomotsune
- JCB, Daiichi Life Insurance
- Nomura Securities
- Nomura Trust
- Nomura Research Institute
- Mitsui and Mitsui Fudosan
- Nomura Asset Management
- Nomura Institute of Capital Markets Research
Investments into Blockchain – NRI
Last year, the company also invested in the smart contract development firm Omise Holdings, the parent company of OmiseGo (OMG) and GO.Exchange. The investment increased operations for the firm across a number of verticals. Additionally, the exchange Quantstamp secured funding from the firm on March 8, 2019. As part of the deal, the U.S.-based firm opened a subsidiary in Japan. Quantstamp provides an automated tool for developers and users that helps locate vulnerabilities in smart contracts. Also, the company offers auditing services for large-scale blockchain platforms.
Nomura Pushes Tokenization in Asia
Nomura continues to be a major advocate for tokenization in the financial sector. As such, the company is ideally positioned for the digitization of the markets. You can expect to hear more exciting developments from this team, as their projects continue to shape the Japanese market moving forward.
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