A U.S.-based startup, Factury, is trying to apply blockchain technology to fixed-income markets, developing the means to originate and distribute asset-backed securities in new ways.
Arturs Ivanovs, CEO and co-founder, says the Philadelphia, P.A.-based company will raise up to $16 million this December via an initial coin offering, with the proceeds meant to hire more people in engineering, sales and operations.
Although the primary purpose of FIC is to improve upon origination and selling via bank middlemen, Ivanovs hopes it would also develop into a crypto-currency fixed-income market: “We want to recreate a traditional market infrastructure for the crypto world, to enable the listing, trading and securitization of interest-earning bonds.”
Today options for people holding crypto assets such as Bitcoin and Ether are limited to equity-like or utility tokens.
The Ripple of bonds?
The decentralized platform he and his team are trying to create is called FIC Network.
“We want to assert ourselves as the blockchain solution for fixed income, just as Ripple is to payments,” Ivanovs told DigFin.
Jeb McCaleb, a founder behind Ripple, as well as Stellar.org and early bitcoin exchange Mt. Gox, is serving as an advisor to Factury. The startup is not only taking a page out of Ripple’s playbook in how to establish market presence in the crypto world; it is using Stellar’s technology.
The company’s officers argue that securitization in the traditional world is too expensive and opaque. Investors in mortgage-backed securities and other ABS instruments often lack visibility at the loan-specific level of a bundle of assets. They rely instead of credit rating agencies, auditors and test samples – a dependence that proved fatal during the sub-prime mortgage craze of the 2000s.
Decentralizing the process should change the relationship between borrowers, packagers of loans such as investment banks, and the investors who buy them.
There remains a technical hurdle to realizing this vision: security. Factury is raising money in part to address the issues around how to ensure the tokenization of cashflow data is protected, and how to permission different layers of disclosure at different stages of transactions.
“This layering of privacy has not yet been solved,” Ivanovs said. But in theory it would allow more transparency, much faster settlement, and much lower costs to investors across all types of fixed income and credit derivatives, he says.
This is how it works in theory:
A distributed ledger would enable the sharing of information at a granular level, varying from credit scores to underwriting procedures, secured at varying levels of privacy or permissions.
By using blockchain to tokenize cashflows, FIC Network could recast the way ABSs are tranched and rated. For example, payment schedules of a loan (or batch of loans) could be teased out and sold at different prices, reflecting the difference in risk of default over time.
“This would be good for insurance companies and other investors who need to manage assets and liabilities, because it would allow them to manage their portfolios on a daily basis,” Ivanovs said.
By fractionalizing loans this way, it can create a new asset class within the ABS world. “A new layer of tokenized cashflows will emerge,” he said.
FIC Network’s ledger would ensure information is shared and payments made, with varying levels of disclosure among investment banks, investors, appraisors, credit rating agencies and law firms.
A public level would cover basic asset terms, such as maturity, principal size and coupon dates. Lenders could then opt to share more detailed information with arrangers or investors, including credit scores, collateral and geography (FIC has developed 120 factors).
A third, most private level of disclosure would be triggered when a hedge fund or other buyer becomes the owner of an asset, such as the names of the end borrower, and identifiers such as social-security numbers in the U.S.
Ivanovs co-founded Factury in 2016. He is Latvian, and witnessed the near-destruction of his country’s economy in the wake of the 2008 global financial crisis, which left him thinking about more transparent, safer models. He worked for the Latvian government and business interests in real estate and other sectors, before moving to the U.S. to set up Factuary.
His partners are Alvar Soosaar, COO in Philadelphia, who has 20 years experience running fixed-income portfolios; and Aigars Staks, CTO in Latvia, who has worked on large-scale tech projects for the likes of PwC and Microsoft.
Backers of the company include Boost VC, Startup Bootcamp NYC, and Bialla Venture Partners. A big-four accounting firm whom Ivanovs declined to name is also advising the startup.