Securitization is an established financial technique, heavily regulated and widely used in traditional finance (TradFi). It covers a broad range of financial assets, both performing and non-performing, including traditional (plain vanilla) and more complex (esoteric) ones. It plays a crucial role for major players such as banks and institutional investors.
Through securitization, any set of financial assets can be segregated into a dedicated and funded vehicle, transforming and dividing them into negotiable financial instruments, making the underlying accessible to a wide audience of financial operators.
Conversely, ‘tokenization’ of the same financial assets using Blockchain technology aims to achieve the same objectives as securitization within an innovative, immutable, and highly scalable technological infrastructure. In fact, it represents an evolution of the traditional approach (TradFi) with numerous advantages.
Diversity and diversification of underlying assets, fractionalization, and negotiability of representative securities, expansion of potential participants, efficiency and cost-effectiveness of the process, robustness, and reliability of the underlying contractual framework, compliance with regulatory requirements for originators and investors, and full access to detailed historical and real-time information about the underlying assets are well-established features developed over decades of securitization use in traditional finance. The Blockchain technology aims to replicate and enhance these features.
Much has already been said and written about the advantages offered by the adoption of smart contracts and the application of Distributed Ledger Technology (DLT) in the world of financial services, including the securitization sector. Let’s focus on two specific areas: (i) the creation and negotiability of instruments representing the underlying assets, and (ii) the historical and dynamic information archive on these assets.
The first point, related to the creation and negotiability of instruments (whether securities, bonds, or tokens), is gaining traction with a rapid and constructive dialogue with market regulators.
The increasing focus on the feasibility studies for creating digital currencies promoted by major central banks contributes to establishing the right framework for the evolution from TradFi to widespread adoption of Blockchain technology. The acceleration can be seen in the objectives set out in the “Call for Proposal 2022” by Banca d’Italia, which perfectly summarizes the role of innovation and technology in the regulatory environment: “Application of Distributed Ledger Technology (DLT) to banking, financial, insurance, and payment services, with a particular focus on meeting governance requirements and complying with applicable regulations and guidelines; robust settlement mechanisms, with particular reference to solutions that ensure final settlement of payments in central bank currency; interoperability with other DLT platforms […] and technical and legal operational certainty (e.g., transaction finality); customer protection.”
The gradual adoption of security tokens by institutional investors, alongside the consolidation of practices and compliance measures, paves the way for the technology’s flourishing and widespread adoption.
The second area, equally important, where the transition from TradFi to widespread adoption of Blockchain technology can bring significant advantages and profound transformations in the financial industry, is the management of data related to underlying assets.
Even in public securitizations, accessing comprehensive historical and real-time information on underlying assets is an inefficient, imperfect, partial, and complicated process. Only an investor who has followed an operation since its inception will have access to the entire historical documentation. In contrast, for new investors interested in entering the secondary market of a securitization, gathering and analyzing detailed contractual and reporting backgrounds could be a significant barrier or organizational effort, both for them and for the master servicers, who are increasingly required to archive, process, and provide easily accessible information about the underlying assets. Adopting a standardized Blockchain architecture will make the entire information document set extremely accessible and available, contributing to creating/reinvigorating a secondary market for tokens related to the underlying assets, facilitating compliance with regulatory obligations for key parties among securitization service providers.
The challenge is open between developers and managers of Blockchain-based platforms and traditional TradFi infrastructure providers to quickly position themselves and efficiently occupy the spaces that are opening up due to the rapid development of regulatory and technological contexts. These spaces will inevitably revolutionize the types and methods of services offered, and consequently, the identity of certain entities. It’s no coincidence that in several European countries, the figure of the master servicer is no longer necessary today, as the Blockchain platform (and its provider) is perfectly recognized by investors, originators, and service providers, as long as it complies fully with the locally established regulatory standards.