New work by Yao Qian: Asset digitization and asset securitization complement each other


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Yao Qian believes that asset digitization and asset securitization are complementary. At present, the application of trusted technologies such as blockchain is not widespread, and asset registration is more dependent on off-chain central institutions.

Original Title: “Blockchain and Asset Securitization | New Book Release”
Written by: Yao Qian, Director of the Science and Technology Regulatory Bureau of China Securities Regulatory Commission Source: Murphy, CITIC Publishing

This article is the preface of “Blockchain and Asset Securitization”.

In recent years, blockchain has been widely used in the financial field. The blockchain cuts in from the liability side and is closely related to the central bank’s digital currency and the credit currency of commercial banks; the block chain cuts in from the asset side to realize the digitization of assets, and asset digitization is a higher-level form of asset securitization.

How does blockchain combine with supply chain, 5G, and IoT technologies to digitize assets and ensure the uniqueness of underlying assets? To what extent has the transaction of digital assets in overseas markets developed?

If you want to understand these questions, this article may give you the answers!

Asset securitization refers to the process of packaging the future cash flow of underlying assets, using it as value repayment, and issuing asset-backed securities (ABS).

Since the US Government National Mortgage Association issued the first asset-backed securities in 1970, asset securitization has developed into a financial innovation tool with extensive influence. Taking the Federal Reserve as an example, its monetary quantitative easing, in addition to buying US Treasury bonds, is the purchase of Mortgage-Backed Securities (MBS).

my country’s asset securitization pilot program was launched in 2005. After the global financial crisis broke out in 2008, it slowed down for a while, and restarted in 2012. After the filing system was implemented in 2015, it entered a stage of rapid development. Financial leasing, fee income rights, accounts receivable Asset securitization products, such as financing, factoring financing, auto mortgage loans, and commercial real estate mortgage loans, continue to introduce new ones. Recently, pilot projects of infrastructure public offering REITs (Real Estate Investment Trusts) are being carried out.

Generally speaking, asset securitization includes multiple steps such as construction of asset pools, bankruptcy isolation, credit enhancement, securities rating, securities sales, listing, trading, duration management, and payment at maturity. The process is long and involves multiple entities. Including sponsors, SPV (Special Purpose Vehicle), underwriters, investment banks, credit enhancement agencies, guarantee agencies, rating agencies, custodians, lawyers, accountants, etc.

It uses a special legal entity to assist in the transfer of returns (risks), and can layer securities with different risk/return characteristics. It is a complex financial innovation and is even called the most advanced “financial alchemy.”

In my opinion, although the process of asset securitization is complicated, the principle is actually simple.

The core is to transform complex and difficult-to-think basic assets into market-oriented, credible assets, and then standardize and divide them for purchase and trading by many investors. Trustworthiness is the prerequisite for asset circulation.

The original assets are “hidden” in the company’s balance sheet. Outsiders do not know whether the property rights are true, clear, and reliable. Therefore, it is difficult to “think” and naturally cannot be transferred and traded. And asset securitization has changed the untrustworthy status of original assets through financial intermediary function and legal design centered on SPV.

The due diligence of investment banks and accountants on the asset portfolio, the rating services of rating agencies and the custody services of custodian banks ensure the credibility of the underlying assets. The legal design with SPV as the core further guarantees the authenticity, independence and integrity of basic assets.

One is the real sale.

The promoter transfers all the specific assets and the risks and benefits related to the asset to the SPV. After that, the creditors and shareholders of the promoter can no longer claim or exercise any recourse against the underlying securitization assets.

The second is bankruptcy isolation.

Even if the initiator or SPV goes bankrupt, it will not affect the other party’s assets, thereby ensuring the relative independence and integrity of securitized assets.

After the basic assets have changed from “untrustworthy” to “credible”, SPV can also use external guarantees to enhance the credit of the basic assets.

With the emergence of blockchain technology, we can not only use financial intermediary functions and legal means, but also use technical means to ensure the credibility of underlying assets.

Blockchain is a machine that creates trust.

It uses encrypted data structures to verify and store data, uses distributed consensus algorithms to add and update data, and uses codes running on it (ie smart contracts) to ensure the automatic enforcement of business logic. It has collective maintenance and is difficult to tamper with. The advantages of leaving traces throughout the process, easy to trace, open and transparent.

With the widespread application of blockchain technology and the development of 5G and the Internet of Things, blockchain technology is expected to enable all native data related to assets, whether on-chain or off-chain, to be penetrated and traced. Can be self-certified with others.

Then, the credibility of the underlying asset data at this time is the credibility of the underlying asset value. Numbers are value, and value is number. The data and value that were originally separated into “two skins” are truly aggregated into digital assets that integrate physics and logic.

Digital assets have natural credibility advantages, so they have natural liquidity, which can be traded and circulated.

Asset digitization, through the application of trusted technology, enables assets to be circulated without relying on traditional financial intermediaries without relying on traditional financial intermediaries while retaining the original full amount of information. It is a new type of asset activation technique completely different from asset securitization.

It should be said that asset digitization and asset securitization are not a substitute relationship, but a complementary relationship. Especially at the current stage, the application of trusted technologies such as blockchain is not widespread. Many assets are not native on the chain. Asset registration Relying more on off-chain central institutions, asset securitization will still play an important role in revitalizing corporate assets.

But even in the context of asset securitization, blockchain can still play a positive role.

This positive effect includes at least the following aspects.

One is to strengthen the disclosure of asset securitization information.

At present, the information disclosure of asset securitization is limited to the documents issued by the product, and lacks the ability to penetrate the original information of the underlying assets, especially the asset securitization products with multi-level chains, which are more likely to cause opaque information and cause financial risks. We can feel the experience and lessons through the 2008 US subprime mortgage crisis. The use of blockchain technology to establish a distributed ledger can supplement the information of the underlying assets and provide special information disclosure services on the basis of the original information disclosure, so as to realize the credible penetration function of the underlying assets.

The second is to improve the efficiency of the asset securitization industry.

The development of asset securitization business involves multiple parties, and the cost of information exchange and communication and coordination is high. The blockchain technology itself is a peer-to-peer multi-party mutual trust and sharing network, and all participants in asset securitization can conduct efficient information interaction and business collaboration on the blockchain to improve efficiency and reduce costs.

The third is to promote the development of digital securities.

Blockchain has created a new type of digital value registration and exchange technology, which is a new generation of financial market infrastructure. In the era of paper media, the form of securities is a paper certificate, which is based on established characters; in the electronic era, securities are paperless and rely on third-party electronic bookkeeping as the basis; in the digital age, the form of securities is a credible digital certificate. “Digital” as the basis, that is, digital securities. Digital securities are registered on the blockchain, peer-to-peer transactions, and DVP settlement, which can introduce a central counterparty and liquidity saving mechanism. Digital currency and smart contract technology can also bring new imagination to asset securitization, such as automatic cash flow collection and payment.

The fourth is to support supervision.

With the help of digital technology, blockchain-based asset securitization is not only controllable, but supervision can also be more precise.

In short, the combination of blockchain technology and asset securitization is a frontier field that is fantastic and exciting. Although there are many beneficial practices in the industry, in general, this field has only just begun, and there are many topics that can be studied. Whether it is technical, business, or regulatory, there are still many unsolved issues that deserve our in-depth study. And explore.

In view of this, I, together with Mr. Lin Hua, Director of the Lab of Chain Certificate Numbers, and some industry experts with rich practical experience and solid theoretical foundation, jointly wrote the monograph “Blockchain and Asset Securitization”.

I hope that the publication of this book will be helpful to the innovation and development of my country’s asset securitization industry.