Morningstar Credit Ratings Is Building A Blockchain Evaluation System For Tokenized Debt Securities
Morningstar Credit Ratings, a subsidiary of Morningstar Inc has decided to rate a variety of real-world assets, debts, and securities on a block chain, reported Forbes. The parent company started out as a rating agency for mutual funds offered by Prudential, Morgan Stanley and TDAmeritrade.
Even though the firm had the permission to rate only the corporate debts in 2016, the firm managed to generate a whopping $1 billion in revenue, pitting it against the market giants like Fitch Ratings and Moody's. The firm currently offers its rating services to both governments and private firms, however, the firm has only worked on building structured finance debt instruments in the blockchain space.
However, Morningstar can be a driving force in bringing tokenization of real-world assets to the blockchain, given the diverse set of clients it posses. Among its various clients, one firm offers securitized business loans on the ethereum blockchain, another help companies raise funds by selling blockchain securities.
According to the Bank of International settlements, the global debt security industry had $117 trillion in outstanding in March 2019. The emerge of Morningstar can help in unlocking the potential crypto assets market which is on the verge of gaining mainstream adoption.
Michal Brawer, the chief operating officer at Morningstar Credit Rating said,
“We’re working very closely with a number of blockchain-oriented firms who are looking to issue debt instruments on a blockchain. 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 can Leave Mainstream Players Behind in Launching Blockchain-Based Debt Insurance
Major players like S&P, Moody's and Fitch have all expressed their desire in moving the debt insurance to blockchain to ensure better security and transparency. However, none of them are even close to launching their service, on the other hand, Morningstar in a newsletter to its investor back in May revealed that they are in talks with 9 blockchain startups who were interested in doing everything on a blockchain. Starting from originating assets on a blockchain to securitizing and facilitating debt insurance.
In the newsletter Morning start also laid out the plans of how they are going to venture into the blockchain space and how it would help them bring more transparency and efficiency in the debt issuance business.
“I don't think blockchain startups are at the point where they would say they can eliminate the custodian, but they would like to start to chip away at some of the custodian's responsibilities. I don't think anyone is pretending at this stage that they can eliminate the role of the trustee either. But they’re starting to chip away at that too.”
Morningstar to the Device to Methods to Change the Way Debt Securities are Rated on a Blockchain
Morningstar is planning to build two tools to change the way blockchain-based debt securities are rated. The first tool will be based out on ethereum.network initially and will be used for rating bonds directly using oracle. The firm will be building several smart contracts based on real-time data provided by oracle.
“We don't have it fully built out yet, but we are in fact creating technology to be able to disseminate a credit rating on-chain,”
“We refer to it as an oracle of ratings that would be able to come directly from a third party, such as us, and tell interested parties our opinion of the creditworthiness of particular debt issuance.”
The second product will be debt security-focused as well but it would introduce the same quantitative rating model the firm users internally to determine the creditworthiness of these debt securities.
Although the whole mechanism won't be on the blockchain, as the settlement time of these debt securities are really slow, only the input and output data would be put on public ledger which would help the investors test the quality of investment in their own.