Financial Services Giant Morningstar To Offer Ratings For Crypto Assets (#GotBitcoin?)
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. Financial Services Giant Morningstar To Offer Ratings For Crypto Assets (#GotBitcoin?)
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 will give publicly available ratings of one to five stars to the crypto assets, while launching 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.
“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.
Asset Ratings Giant Morningstar Takes First Plunge Into Blockchain Securities
Another day, another blockchain first.
As part of a $39.7 million investment in FAT Brands, the owner of “fast casual” eatery chain Fatburger, DBRS Morningstar has for the first time rated securities issued on a blockchain. Ethereum, to be precise.
As reported by Forbes on Sunday, the Toronto-headquartered ratings firm – which says it rates investment assets from over 2,600 issuers worldwide – actually rated a traditional debt security backed by franchise royalties and upfront fees coming in via Fat Brands companies, which also include Buffalo’s and Ponderosa Steakhouse.
However, the security was structured to include several Ethereum tokens in the investment process. With help from New York-based structuring consultant Cadence, ERC-20 tokens digitally representing the debt security were issued Friday to all investors’ wallets, with transactions logged on the Ethereum blockchain. Quarterly payments will follow in the same way, according to Forbes.
Morningstar reportedly said in its rating that using Ethereum would speed up access to data on the securities, as well as boost transparency.
For the blockchain side of the investment process, $40 million in $CDG, a stablecoin linked to the U.S. dollar, was held by the trustee, UMB Bank, while FAT Brands held other tokens representing two tranches of the debt security.
A smart contract completed the settlement of the trade, passing security tokens to the investors and $CDGs to FAT in transactions visible on blockchain explorers.
“It’s definitely the first rated securitization with a digital asset element, and we’re using it the way it was intended: to provide that level of transparency,” Nelson Chu, founder and CEO of Cadence, told Forbes.
Cadence has previously issued over 60 blockchain securities on Ethereum, though none were rated.
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