This week the BIS published an empirical study of 5,000 asset-backed securities (ABS) issuances in China, comparing the pricing of ABS with and without blockchain. The finding was that “overall blockchain adoption improves ABS pricing significantly.”
Starting in 2017, around 5% of ABS in China use blockchain. ABS is pretty new in the country, with issuances commencing in 2015 and growing to CNY2.9 trillion ($400 billion) by 2020.
Blockchain ABS findings
A conservative estimate is that blockchain lowers the yield spread by 25 basis points although some results showed the impact was as high as 39 basis points. Given the average yield spread in the study was 76 basis points, that’s a major impact.
The authors observed that blockchain has attracted considerable hype with limited academic studies measuring whether or not blockchain delivers on its promise of greater efficiency and transparency for financial transactions.
One expected finding was that where a conventional ABS would normally be more opaque based on the nature of the asset, blockchain adds more value. And the impact is more significant in the primary market than the secondary market.
The results attempted to strip out potential biases such as groups that have worked together on several ABS projects or preferential pricing to promote blockchain. Hence the benefit measurement is a conservative one.
The blockchain ABS experiments
Experiments were grouped based on the type of ABS and the regulator. In China, residential mortgage backed securities (RMBS) and auto loan ABS are supervised (very tightly) by the banking regulator (CBRC). MBS are also very vanilla and standardized.
In contrast, consumer loan ABS and account receivable ABS are supervised by the securities regulator (CSRC). Two ecommerce groups JD and Alibaba extend a significant amount of consumer loans which are individually tiny but have little credit history data. Hence, when packaged up into an ABS they are relatively opaque, although real time reporting can add value. And as a digital solution, blockchain helps with that.
The blockchain benefit was the highest for consumer loans, followed by trade finance and RMBS. For auto loans, it was slightly negative but statistically insignificant. The conclusion was that blockchain was more beneficial for the CSRC-supervised ABS, as expected.
The study also tried to explore blockchain’s advantage based on familiarity with other participants. Where the ABS are standardized such as MBS, familiarity with other participants is positive. But when it’s less standardized and more opaque it can be negative. The authors hypothesize that in the latter case, there may be some suspicion about the use of blockchain itself.
Meanwhile, blockchain-based asset backed securities have been less prevalent in the West, but they’re big hopes for the sector. Figure Technologies has packaged up several mortgage-based ABS on the Provenance blockchain. TradeTeq has been involved in trade finance-based ABS. And Intain started by offering blockchain-based servicing of mortgage ABS and has progressed to creating an ABS marketplace on public blockchain.