Market participants can now take full or partial advantage of public or permissioned blockchain efficiency to structure and execute traditional or fully digital transactions -- or a combination of both — in steps they are comfortable with, after Cadeia recently piloted the first asset-backed securities deal s loans from its platform.
The proof-of-concept transaction securitized traditional corporate loans originated by Bank Frick, a Liechtenstein-based private bank whose assets under management increased to Swiss Francs (CHF) 4.464 billion ($4.8 billion) in the first six months of 2021, an increase of CHF 1.193 billion, largely from clients’ higher deposits in the bank’s crypto broker and exchange business.
The privately placed deal was split into class A, B and C tranches, the latter two mezzanine and equity, according to Rolf Steffens, co-founder and head of structuring at Cadeia who previously worked in structured finance at several global banks. The offering was purchased by one institutional investor and another non-regulated investor, Steffens said.
The Cadeia platform enables structuring of the entire transaction, including the assets and liabilities, covenant tests and trigger levels, and the distribution of interest and principal cash flows. A smart-contact engine then transfers the transaction to a block-chain environment of choice, Ethereum in the case of the Bank Frick deal, Steffens said. He added that smart contracts execute the settlement at issuance and the rest of the transaction through maturity.
The Cadeia platform can use public blockchains such as Ethereum or bitcoin as well as permissioned blockchains.
Key to Cadeia’s platform, Steffens said, is that while deals are structured and proceed via DLT, it can securitize traditional assets or those originated on the blockchain, and similarly distribute conventional bonds or digital tokens, or a combination. The Bank Frick deal, for example, securitized traditional corporate loans and issued digital tokens, and it also could have mixed traditional and tokenized assets and/or liabilities.
The Cadeia platform can transact cash flows in fiat currencies, which are ones backed by a central bank, or crypto currencies including stable coins, keeping data confidential when appropriate.
“The blockchain provides a trusted platform where the cash flows and other structured-transaction components are agreed to on day one, and the smart contracts execute the transaction over its entire life,” Steffens said. “If the asset side performs poorly and hits pre-defined triggers, then the blockchain will automatically adjust the waterfalls and resulting cash flows according to the predefined rules.”
A securitization done fully on the blockchain, from asset origination through the last payment to investors, should be highly efficient and give investors complete transparency into the transactions’ workings and cash flows. Such a “launch and forget” scenario is the ideal, Steffens said, since it would all but eliminate costly and error-prone system breaks and redundant due diligence by multiple parties. In addition, the Cadeia platform provides an unalterable and transparent audit trail. All participants in the transaction can access the same data, subject to their individually granted permissions, via APIs or Cadeia’s web application, rather than having to make significant changes to legacy systems or to learn the specific script of the DLT environment.
“Transaction parties such as trustees will still play a role, but the Cadeia platform will make their lives much easier,” Steffens said, noting that trustees can immediately access the Cadeia platform to check servicer reports. “Users can decide which parties will be involved, and our platform brings all the parties together in one place.”
Gaining favor bit by bit
Participants in ABS deals will likely need more time to become comfortable with the new technology, especially given the lack of regulation, and Cadeia’s hybrid approach enables participants in a deal can choose the extent to which DLT is used.
That approach was also favored by experts at the 27th Annual ABS East conference, held recently in Miami, who said blockchain must be introduced to market participants in digestible pieces, despite the significant benefits that full adoption promises.
“It’s about moving slowly and making sure the traditional players are comfortable with the technology and seeing efficiencies,” said Guillaume Fillebeen, consulting director at Intain Inc., on the ABS East blockchain panel.
Redwood Trust has taken that approach on four large Sequoia Mortgage Trust transactions this year, tapping Liquid Mortgage, a digital asset and data platform in which Redwood holds a minority interest, to act as distributed-ledger agent. The initiative provides investors with timelier information about principal and interest payments, a basic use of the technology. Fred Matera, managing director and head of residential at the specialty finance company, described the move in a statement as the “first step on a path to putting an entire RMBS transaction on the blockchain.
WSFS Bank announced in February 2020 partnering with fintech Intain Inc. to create a tool enabling trustee reporting on a permissioned blockchain, providing reports to investors faster and with more accuracy, down to loan-level detail.
Also in early 2020, Figure Technology sponsored what it claimed to be the first securitization, privately place, to be conducted entirely over the blockchain, both assets and liabilities.
None of the parties involved in the efforts announced in 2020 responded to queries about the status of the initiatives today.
