Tokenization of assets: Financial assets such as trade receivables (invoices), SME loans are turned into unique tokens on Ethereum blockchain. The security representing fractional interest in the tokenized asset pool is also represented by a token. The fiat currency used in settling the security transaction is another token (fiat backed token). The properties of these tokens mimic those of the assets they represent (programmable money). For example, the loan tokens are non-fungible whilst the security and fiat back tokens are fungible.
Smart contract technology: The processes of pooling assets, issuing security tokens, collecting underlying asset’s repayment and paying out returns to investors are automated via smart contracts. Smart contracts are pieces of code residing on the blockchain that have the ability to self-execute once certain conditions are met or when there is a trigger via a function call.
One example of a smart contract is the auction contract used in security token sale. Using Dutch Auction approach whereby investors indicate their interests in participating in a securitization series at different (declining) price points (or increasing yields) until a ‘market-clearing’ price is reached could be a great way to define true market price. This process would be totally transparent and provably fair as investors, large or small, all subscribe at the same price point where supply and demand meet.
Standardised APIs: Asset performance data such as repayment, obligor's financial position are dynamically updated to a smart securitization platform via APIs. As originators are often retained as servicers of the underlying portfolio, it is important that any changes in the underlying portfolio’s quality are automatically updated in the platform. The platform would consume APIs provided by other providers such as credit information bureaus or Open Banking.
End-to-end digital: All processes are done digitally on web or mobile apps. There is no need for any paper. Issuers or originators can set up pools and invite others such as auditors, trustees, lawyers to collaborate. Communication is streamlined via an TV in-app chat and notifications. Investors can use the mobile app to bid for security and to monitor underlying portfolio performance 24/7.
This approach would enable securitisations to be simpler, more transparent and standardised. The platform can securitise portfolios of any size and not just large ones. This proposition would seek to capture the ‘long tail’ of securitisation opportunities i.e. democratising access to this innovative funding technique for many asset originators. Instead of relying on the wholesale funding market, originators have securitisation as another funding option.