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.
Investment Activity in Japan Signals Interest in Digital Securitization
All the pieces are falling into place for the digital securities market in Japan. One of the biggest traditional financial institutions in Japan, Tokai Tokyo Financial Holdings is advancing rapidly with its plans to digitize the financial services the company provides in a traditional sense.
New Investment in Blockchain Company by Tokai Tokyo
According to a Nikkei report, Tokai Tokyo completed a new investment in blockchain development company Hash Dash Holdings. Tokai Tokyo Financial Holdings will own 33% shares of the company, which is working on integrating the blockchain technology into the traditional financial industry. The aim is to enable the issuance of digital securities while providing investors with a trading service on their mobile devices.
Digital securitization is picking up steam as more traditional financial institutions dare into the digital asset space. With uncertainty looming over traditional markets, digital assets are piquing the interest of investors – and not only retail, but institutions are taking clear steps to be part of the paradigm shift. Tokai Tokyo’s efforts to build a digital securities exchange is an example of the latest venture into the field.
Per the report, Tokai Tokyo’s platform will tokenize securities, and will start with Japan’s real estate industry with plans to explore digitization of Intellectual Property assets as well as corporate bonds.
Alongside Tokai Tokyo, other shareholders are the founder of Hash Dash and ICH X Tech, the company operating iSTOX. With this venture, the goal is to issue digital securities powered by blockchain technology and trade these on iSTOX, the digital security exchange based in Singapore.
The iSTOX exchange also has previous strong ties with Tokai Tokyo, as the latter had announced a $4.5 million investment in ICH X Tech just seven months ago in November 2019.
As reported, the iSTOX digital exchange was part of the MAS Fintech Sandbox program undergone by the Monetary Authority of Singapore and was one of the select successful products. The motivation behind the investment was to make digital securities on the iSTOX platform available to Japanese investors; this being possible through the brokerage capabilities of Tokai Tokyo Financial Holdings.
If at the time, the digital securities exchange was a sandbox, it has since become a recognized market operator with a capital market services license. Other iSTOX investors included the Singapore Exchange (SGX), state-owned Temasek’s investment firm Heliconia Capital, and Hanwha Asset Management.
Asian countries have been known to be at the forefront of the digital asset industry – starting off with a dominant presence in the mining industry to having a lot of cryptocurrency exchange platforms across different countries and a population eager to experiment with novel cryptocurrencies.
Japanese Companies Bringing Digital Securitization Closer to Mainstream
In the past few years, Japanese companies have also been actively seeking opportunities to enter the digital securitization space. SBI Holdings has been long making the headlines in the industry with their collaboration with Ripple and XRP.
In the past year, Nomura and Nomura Research Institute started the BOOSTRY platform, which focuses on securities and bonds issuance. Tokenization platform Securitize already created a Japanese real estate investment platform, receiving funding from numerous high profile Japanese investment firms.
While Tokai Tokyo Financial Holdings is almost a century old company with deep roots in the traditional financial markets, the company is determined to adapt to changing market conditions.
In December, Tokai Tokyo made an investment of 500 million yen ($4.7 million) in Huobi Japan, the popular crypto exchange licensed in Japan. In order to execute their vision of becoming an “advanced financial integrated group”, Tokai Tokyo is focused on meeting consumer needs by deploying leading technologies from FinTech and the cryptocurrency space, according to the company’s press release at the time.
Further in the press release it was stated:
Also, in March Tokai Tokyo became a member of Japan Security Token Offering Association, a self-regulatory organization for STOs.
The intent from the Japanese financial giant is clear and it looks like the company is making it a priority to have a strong foothold in the digital securitization industry.
Overall, it’s a natural and likely necessary progression that financial institutions have to consider, seeing that in the next decade digital securities may become the prevalent financial products that investors look for.
Real-World Assets as Collateral for DeFi, Made Possible with MakerDAO
The cryptocurrency space was borne out of a desire to bring about a better financial system and infrastructure that is inclusive for anyone, anywhere.
The crypto industry has matured significantly since 2010 when Bitcoin kicked off a new wave that today spawned a whole new industry. The crypto community continually progressed with new tools and capabilities being gradually built up.
Nonetheless these capabilities that promise quicker settlement times, trustless global accessibility and granular asset control have mostly remained gated within the crypto realm.
Bringing Together Real-World and Crypto Assets
Now, the ambition is to bridge the gap between real-world assets and cryptocurrencies. Specifically in the DeFi space, that aims to provide a borderless financing infrastructure, the first steps are being made to bring real-world assets as collateral for loan issuance.
The community of MakerDAO, that is behind the DAI stablecoin, arguably one of the most popular DeFi projects, has confirmed the vote on whether to allow real-world assets to be included as collateral options.
This comes following the effort led by the startup Centrifuge, that developed a protocol that lets users turn real assets into securities against which ERC20 tokens can be issued. This enables real world asset securitization as these tokens are interest-bearing and will be issued as NFTs (Non-Fungible Tokens).
DeFi applications built mostly on top of the Ethereum blockchain promise to give more people access to borrowing, lending, and other services because they eliminate the need to go and transact through a financial institution.
In the case of MakerDAO, the system built with Maker (MKR) and DAI lets users deposit cryptocurrency-denominated collateral to take out loans denominated in the U.S. dollar-pegged stablecoin DAI.
While recently the DeFi space celebrated a huge milestone with $1 billion locked in various applications across the board, participation in DeFi today is limited because it requires that users have purely crypto-native assets.
Getting real-world assets involved in the DeFi industry is what Centrifuge is pursuing with its Ethereum Dapp called Tinlake. The app allows for the securitization of real-world assets and have these represented on the blockchain as tokens, which can in turn be used to gain access to DeFi services.
What is Asset Tokentization?
Asset tokenization refers to the act of turning the ownership of a real-world asset into a digital token. This can be done in various ways, but all result in the legally-upheld bridge between the physical asset and its representative token.
Deeds, titles, and certificates are all traditional versions of a token. A deed to a house represents ownership of that house. The token refers to the digitally native asset which represents the real-world asset itself.
The first two types of assets that are available for tokenization are music streaming royalties enabled by PaperChain and ConsolFreight’s freight shipping invoices.
With the positive vote from the MakerDAO community, now anyone – be it individuals or companies – is able to utilize future cash flows from music streaming royalties or shipping invoices as collateral to take out loans for example.
Centrifuge’s Lucas Vogelsang notes the partnership could be the world’s first application of DeFi to a real-world business issue. Particularly, the solution helps ensure quick liquidity for artists and supply chain firms, without the hassles of going through traditional ways of financing.
MakerDAO’s Rune Christensen has also shared a highly optimistic vision as the two proposals represent the first step towards the expansion of DeFi’s field of application:
“These should be seen as the first two [RWAs] in the greatest portfolio of assets that’s ever been built. It’s just the first step. Thousands and thousands of assets will exist alongside them.”
There are still issues and restrictions when it comes to securitization of real-world assets and introduces new risks to the DeFi space.
For instance, Centrifuge’s tokenization process through its app still falls under the securities law. Since both Paperchain and ConsolFreight are based in the U.S. only accredited investors will have access to these assets.
Another compromise that was made in order to bring real-world assets to DeFi is Centrifuge setting up a special purpose vehicle (SPV) that will have the assets associated with, from a legal touchpoint. Lenders, in the event of default, would have to rely on the legal system to enforce their rights to the collateral, rather than an automated smart contract that can do so with on-chain assets.
While this is necessary to have a claim for the tokenized real-world assets, it represents a single-point of failure. But this is a trade-off that Centrifuge’s Lucas Vogelsang says is necessary in order to bring real world assets on-chain.
Chinese Bank Issues First Asset-Backed Commercial Paper Utilizing Blockchain
As part of its country-wide push to adopt blockchain technology, China Zheshang Bank (CZB) – a national joint-stock commercial bank based in the Zhejiang province – has brought to market an asset-backed commercial paper (ABCP) that was issued and distributed with the help of blockchain technology.
First Asset-Backed Commercial Paper Using Blockchain
The endeavour is part of the Chinese government providing financial support to small and medium-sized enterprises following the economic contraction during the last 6 months. This is the first phase of the “Lianxin Lianjie Asset-backed Commercial Paper” underwritten by Zheshang Bank and amounts to 120 Million Yuan (ca. $17 Million).
The project is one of the first five pilot projects of the China Interbank Market Dealers Association to launch asset-backed commercial paper (ABCP) products. The total amount of this first financing round is expected to reach 3.324 billion Yuan ($470 million) and has four other pillars in its programme. If Zheshang Bank’s issuance is directed towards SME financing, the other ABCP pilots include large institutions and state banks. For example, CITIC Construction Investment Securities and China CITIC Bank are underwriting a coal supply chain and Anji Leasing (car leasing) is issuing an ABCP underwritten by state banks Agricultural Bank and Bank of China.
Not all projects are utilizing blockchain technology to complete their financing issuance, but according to reports, the issuance by Zhenshang Bank successfully used blockchain technology.
Recently, under the guidance of the Chinese Central Bank, the Association of Dealers promoted the development of asset securitization products, and launched the asset-supported financing direct innovation product-ABCP, which is a short-term, rolling issuance version of traditional asset-backed notes (ABN), that provides enterprises with a tool that combines liquidity and asset-liability management.
The Lianxin Lianjie ABCP was issued with a maturity of six months with the option of rollover issuance. The money-market product is backed by assets of nine enterprises in sectors including industrial chemicals and smart city technology.
Understanding ABCPs and Their Use Case
Generally, asset-backed commercial papers are short-term securitization products issued by single or multiple companies backed by a corporation’s assets – which can be accounts receivable, bills, providing a solution for financial liquidity for a company’s operations.
The maturity date of an ABCP is usually set at no more than 270 days and issued either on an interest-bearing or discount basis.
The security is backed by the corporation’s collateral, which might include future payments to be made on credit cards, auto loans, student loans, and collateralized debt obligations (CDOs). The proceeds of an ABCP issue is used primarily to obtain interests in various types of assets, either through asset purchase or secured lending transactions.
According to China Zheshang Bank, the launch of the Lianxin ABCP makes it easier for small and medium-sized enterprises to seek and get financial support directly, with blockchain technology enabling quicker settlement, better transparency and easier management.
The product opens the door to an innovative design of asset securitization building an open market financing channel for small and medium-sized enterprises, which greatly improves the direct financing of enterprises.
China’s Push towards the Digital Economy Continues
China has been vying for more traction of the blockchain technology in innovating payments and financial flows. In August 2019, President Xi Jinping had called for the acceleration of the country’s blockchain development and adoption in suitable application use cases.
The president pointed out that it is necessary to strengthen fundamental research of blockchain technology and enhance innovation, enabling China to take a leading position in the blockchain field.
Ever since, China and its institutions have been moving forward without hesitation in implementing programs that utilize the new technology and its product innovation capabilities.
Next to its efforts on building and implementing its Central Bank Digital Currency (CBDC), the country has also made strides in promoting blockchain technology with their Blockchain Service Network (BSN), that was unveiled and launched in April.
The BSN initiative is led by the State Information Center, a government agency under the National Development and Reform Commission, as well as state-owned telecommunication giants including China Telecom, China Unicom and payments firm China Union Pay.
If it works as envisioned, companies and software developers will be able to plug into the BSN and build blockchain-based applications. The goal is to reduce their operational costs, improve flexibility and provide better regulatory oversight.