Of the various well-established asset classes that could integrate blockchain technology the easiest, fixed income has received the greatest attention in the past couple of years. IntelAlley caught up with Arturs Ivanovs, founder & CEO of FIC Network, to discuss the bond market’s reaction to the new technology.
How would you describe the credit market’s uptake of blockchain-issued bonds?
It is in the tryout period by many financial institutions right now. Some are building their own internal optimization tools and applications using blockchain technology specifically for primary digital blockchain bond issuances. That is soon going to change as these applications will be interconnected via “operating systems.”
The real cost and efficiency benefits will emerge when independent platforms and marketplaces become available for these institutions. Benefits will include real-time order books, allocation management, ease of transfers, near real-time settlement and coupon payment flow, and the vast data that can be extracted throughout the lifecycle of the instrument.
We are positioning FIC Network as one such “operating system” for the bond market.
What is the greatest hindrance to adoption?
Education and lack of infrastructure are the two main factors.
Many decision-makers still confuse digital securities with cryptocurrencies and thus are reluctant to try blockchain-based platforms. We are always focusing on showing our platform in action to alleviate these unknowns and manifest the efficiencies it will bring to their organizations through automated workflows that traditionally have been manual in nature.
In terms of the infrastructure, there is over $40 trillion of debt securities outstanding on traditional market infrastructure with slow processing times, bilateral intermediaries, and low data availability. We have plans to create a module where these securities can be transformed into digital blockchain securities to fully benefit from FIC Platform’s efficiencies and transparency for bond coupon flows and secondary market transactions.
Is the hindrance permanent? What can be done to reduce its effects?
The hindrance is not permanent. Many innovative investment banks that we have engaged believe that digital securities are the future and are exploring the utilization of this technology.
My team’s own way of increasing adoption is to collaborate with innovative broker-dealers and issuers to issue billions of dollars worth of bonds through our platform. I am aiming for $100 billion in principal issued through our platform which should be a good enough signal that the digital fixed income market is the future. Long way to go though.
One of blockchain’s promises is fractionalizing assets. Has the market seen such an exercise yet? When do you think it will?
I have not seen a sensible fractionalized asset project so far. I believe that tokenizing individual future cash flows think coupon payments as zero-coupon bonds, is going to benefit insurance companies and corporations doing asset liability management. Our platform has the ability to do that today for newly issued digital bonds, but the market participants do not know that they need it yet. Hard to predict the exact time when such things will get adoption.
What do you see as the next major sea change in this space?
Change in the bond market structure and regulations.
I think that the processes ranging from origination to distribution to trading will be completely disrupted. Humans will be less important in structuring, sales, trading processes. The broker-dealers that will change before they have to will gain the most.
Hopefully, the regulators will provide more guidance to the digital securities space.