Morningstar Credit Ratings is planning an evaluation system for debt securities issued as tokens on a blockchain to make the emerging asset class more credible for investors.
The new rating services could enable a migration of the $117 trillion debt securities industry, which is administered and governed by custodians and trustees, to a decentralized financial network, Michael Brawer, chief operating officer at Morningstar Credit Ratings, said in a Forbes interview on Tuesday.
Billions of dollars investment would enter the crypto space as the new rating services can make the new asset class more credible, Brawer said.
The rating arm of Morningstar is looking to evaluate such cryptoassets as how it usually rates a traditional bond, but it will make the credit ratings as part of the blockchain.
Meanwhile, the rating agency also plans to launch a premium custom service that uses its internal modeling to help a client evaluate such investments.
According to the report, Morningstar’s system for rating bonds will be place directly on the Ethereum blockchain and eventually on other blockchains, through technology called an oracle.
The public ratings could be launched later this year whereas the premium service would come out by the end of 2020.
Brawer said:
“We’re looking to see how we can also provide credit opinions, whether it’s a credit rating or different types of credit data and credit analytics that accompany those debt instruments, and we’re also looking to provide our services on a blockchain.”
Morningstar realized the demand for rating services in the crypto space when it was approached by a range of investors who issue and securitize debt securities, including small business loans and home equities on blockchain.
While the company’s rating services cover both government and corporate bonds, its blockchain products are still limited to structured debt instruments, the company said in the report.
Beside security and convenience, investors can directly connect lenders and borrowers, and eliminate custodians and trustees in a transaction saving as much as 500 basis points in fees.
Morningstar is still not sure if the U.S. Securities and Exchange Commission will ask them to “enhance” their blockchain methodology.
“There’s a very elaborate and intricate governance process which is all based on Dodd-Frank law and SEC regulations,” Brawer said in the report.
There are a few potential candidates that would partner with Morningstar to launch the inaugural product, including fintech startup Figure, alternative investment company Cadence and DeFi platform Polymath.
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