The State of Security Tokens 2022 — Ratings for Security Tokens
Rating Improvements via Blockchain
Much like security tokens bring real-time liquidity to numerous asset classes, they can also bring enhanced rating capabilities to new and existing assets. Look at the incumbents in the credit rating game — Fitch Ratings, Moody’s, and Standard & Poor’s. These organizations are trusted to present fair and accurate ratings of the underlying assets within credit products. These ratings not only affect returns potential and yield amounts, but more importantly provide investors with some transparency into the underlying investment.
Unfortunately, as depicted in the classic book Too Big to Fail and its counterpart movie The Big Short, there was a heavy lack of transparency and discrepancy between the ratings and underlying assets pre-2008. With a primary focus on US mortgages and Mortgage-Backed Securities, issuing banks and parties were underwriting mortgages with very loose and unprecedented freedoms. However, the credit ratings of these products were pretty standard across the board, regardless of the difference in the underwritten asset, issuer, or borrower. This led to a widening gap of “quality assets” on paper per the ratings and “quality assets” in reality — an asymmetry that was likely only evident to those on the inside — which ultimately led to the housing crisis of 2008.
One of the pinnacles surrounding private data technology on the blockchain is the full transparency of asset-level data — transparency that used to be one-sided. In the case of credit ratings, Moody’s, Fitch, and S&P could probably not hide the “buried” sub-par assets had they been managed on the blockchain. Michael Burry probably wouldn’t have been the only fund manager to notice this discrepancy (this is an exaggeration — I know there were others!). And the fall-out may have been managed earlier and with less severe outcomes. Inveniam has even seen improved ratings on credit assets through their own technology, and we expect this to extend beyond the fixed income realm into other tokenized asset classes.
Clear Rating
As a subsidiary of the security token-enabled Broker-Dealer Entoro, Clear Rating can be utilized in rating and bringing transparency to various features baked into a security token. Clear Rating was originally intended to be Entoro’s valuation and rating arm of their investment banking process, although it’s plausible that Clear Rating ends up spinning-off into a standalone service given the need for a dedicated ratings agency within the security token ecosystem.
As covered in the “Data Providers” section of this publication, Inveniam found that its services can bring assets to a higher-quality rating simply through the transparency and verification capabilities associated with assets on the blockchain. Similarly, Clear Rating can bring a “stamp of approval” or third party opinion surrounding certain functions associated with 1) security tokens, 2) underlying assets, or 3) issuing companies themselves.
Crypto Asset Rating (CAR)
One company that currently rates hundreds of crypto assets actually has its eyes set on the rating of security tokens. Crypto Asset Rating (CAR), has its own proprietary rating system that draws from 150+ parameters across 15 categories, and can dig into the asset itself, the issuing company, and the network upon which an asset exists (if applicable). Pending a successful launch of its TAP, it’s very likely CAR includes a rating on every security token and tokenized asset it lists.
Active Examples — Fitch Ratings, Moody’s, Morningstar
Fitch Ratings, one of the most prominent rating agencies along with Moody’s, has rated several security tokens. The ratings typically encompass quality of the underlying asset and the transparency associated with the blockchain technology.
We expect the following examples of ratings to set the foundation for a vast amount of future ratings from the likes of Fitch, Moody’s, and perhaps even Zacks.
- European Investment Bank (EIB) — Digital Bond Issuance (Fitch AAA Rating)
- Societe Generale — Obligations de Financement de l’Habitat (Fitch AAA Rating, Moody’s Aaa Rating)
- FAT Brands — $40 Million Ethereum-based Bonds (Morningstar BB and B)
- General Stablecoin Commentary (link)
See the full Data Networks & Infrastructure coverage HERE.
Next week’s edition will cover Tokenization in the Private Markets.
