IntainMARKETS, which we announced middle of last year, will be the first digital marketplace for structured finance with integrated on-chain deal administration. IntainMARKETS will bring efficiency to asset- and nortgaged-backed investments, an asset class with annual issuances exceeding $2T (with $13T in outstanding), through digitization and integration.
Last quarter, we completed a successful pilot with Wells Fargo. Through this pilot we received weekly feedback from an institution that could evaluate the platform as an originator (being the leading mortgage lender in the US), as an underwriter, an investor and a payment services provider. Further, the inputs from financial institutions (FIs) as part of the deals we have been onboarding with IntainADMIN in the last three years, and regular interactions with potential issuers, investors and service providers on IntainMARKETS (and corresponding iterations) during the last six months, has helped us address key institutional concerns with current DeFi systems.
But what are the Financial Institutions (FIs) concerned about? Why have their concerns not been taken seriously?
(I have bucketed these concerns in broad categories as different functions/departments may deal with these issues within a financial institution.)
Where will data reside? Who will have access to the data? Who will be the validators? (Regulation, Compliance)
What are DAOs — do they substitute a board? Who are ‘anons’ — do they get a background check? (Governance and Vendor Risk Assessment)
What if I lose money/security through a bridge hack? Do you really believe that we can have the same faith in digital custodians that we have in BNY Mellon or State Street? (Blockchain Ecosystem Readiness)
‘Our current cost of custody and settlement is 2–3 bps; with 20bps fees of a digital custodian you can stick to crypto’. Will our deal fees keep changing with ‘gas fees’ or fluctuations on token price? (Business Viability)
We have a digitization roadmap and budget, with defined ROIs and payback periods. How will this initiative fit in? (Transformation Business Case)
With a maturity period of many years, what efficiency and trust benefits do I get with a single instance of a tokenized transaction, if securities servicing is not linked? (Admin and Servicing)
How do we make payments? ‘We will never get approval to make $10M investment using anything other than USD’ (Settlement Issue)
None of these assets originated on blockchain, so how do we trust that asset is real? (On-ramp Challenge)
We believe that dismissing these concerns of FIs as being part of some DeFi vs. TradFi battle has led to many risky, half-baked blockchain-centric solutions.
This is how IntainMARKETS has addressed these concerns:
A Permissioned Network, using Avalanche Subnets:
- Completely US hosted infrastructure ensuring data resides within theUS boundaries
- Validators chosen by network participants must be US entities/individuals who pass a KYC/AML check
- Can be required to hold specific licenses (e.g. FINRA)
- Token economics specific to the subnet with no gas fees for a public chain
Business case based on process efficiency
- FIs evaluate IntainMARKETS as a digital platform (with suite of digital technologies with integrated document reading AI, analytics and data visualization etc.) — same way they would evaluate any current technology investment and are not expected to take a leap of faith based on vision of a blockchain network based new financial system
- Processes automated with IntainMARKETS could be off-chain (Loan Verification, Loan Servicing) or On-Chain (payment waterfalls) with cost reduced by 50%–80% for these processes
Designed for regulations of today, in collaboration with ‘trust’ intermediaries
- Enables required intermediaries like Trustee, Custodians, Underwriters, Servicers etc., making them efficient through automation, rather than create regulatory and compliance risks through a utopian ‘trustless’ system
Compliance with Vendor Risk Assessment frameworks of FIs
- Intain has already gone throughrigorous vendor risk management procedures of many regulated US financial institutions
- In a world of blockchain ventures, with ‘anon’ employees, every Intain employee is not only has a name but is background checked
- Intain is ISO27001:2013 certified for information security practices
- No decision making through DAOs or any other non-compliant governance structures
Eliminating unproven/risky technology components
- No transfer of assets or tokens on bridges
- Two-step verification on assets brought on-chain, first using AI, then reviewed and certified by verification agent specialising in structured finance transactions (details to follow in a subsequent blog on the asset verification process)
- Ability to choose any digital cash/currency, or off-chain settlement (details to follow in a subsequent blog on the settlement process)
We realize that all these ‘deviations’ from the typical DeFi approaches would still not have gotten us the acceptance, if not for credibility we built in structured finance through IntainADMIN, which has achieved mainstream adoption.
With a middle- and back-office oriented approach to digital transformation of structured finance, long back we concluded that, for a financial instrument based on a complex structure, tokenization itself neither addresses the need of transparency nor efficiency. When it was not fashionable, we called it The Boring Blockchain Initiative, and sidestepped ICO, STO, NFT hype cycles, just focusing on building a blockchain enabled-administration platform, IntainADMIN. IntainADMIN automates and integrates administration and servicing roles of key stakeholders in structured finance and reached mainstream adoption.
- More than $6B in assets across more than 28 deals being administered
- Two of the top ten trust banks for U.S. securitizations, WSFS Bank and UMB Bank, already work with Intain to provide Paying Agent services
- In October, 2022, Asset-Backed Alert reported that Wilmington Trust, of M&T Bank Group, would partner with Intain to ‘apply blockchain technology to mortgage-bond transactions.’
- Last year, UMB Bank announced that it would also deploy Verification Agent module of IntainADMIN, that uses artificial intelligence (AI) to verify loan pools. Just during the last quarter, this module onboarded eleven new deals across four different issuers.
So IntainADMIN’s success along with solution design choices we made ensured that IntainMARKETS has received such a positive response from FIs.
In the next two blogs, we explain our approach to two key processes, where current DeFi solutions have faced strongest institutional pushback — ‘On-ramp’ (as it involved building trust in the asset that is on-chain) and Settlement (in absence of CBDC, it needs a payment mechanism that FIs are comfortable with).