By
Godfrey Benjamin
April 12th, 2024
Chicago-based rating firm Morningstar moves into the cryptospace by offering blockchain-based solutions for the global debt securities market.
Chicago based securities rating firm Morningstar has moved ahead of the rest of the securities ratings agencies to begin rating blockchain-based debt securities which are backed by debt assets in the real-world. Being the first time, a rating agency would attempt such a move, the rating firm already has its hands in the cryptocurrency pie as it has been working on building models that provide accurate methods of rating blockchain-based securities.
This move is also an indication that the firm is making inroads in moving on the $117 trillion global debt securities market using blockchain technologies. Last year, it has emerged that the rating firm had already started talks with several blockchain startups in this regard.
According to sources, Credit ratings Chief Operating Officer Michael Brawer said:
“We’re working very closely with a number of blockchain-oriented firms who are looking to issue debt instruments on a blockchain.”
He continued:
“We’re looking to see how we can also provide credit opinions, whether it’s a credit rating or different types of credit data and credit analytics that accompany those debt instruments, and we’re also looking to provide our services on a blockchain.”
While all the major rating agencies have indicated the many advantages of bringing blockchain technologies to the debt securities market, Morningstar seems to be the only rating firm to have come up with public models that effectively handle this scenario. And now it seems it challenging the firms like Fitch and the other “Big Three” rating agencies, Moody’s and Standard & Poor’s.
The first one effectively uses contracts called oracles to put rating systems on public blockchains such as Ethereum. Oracles work as a bridge between blockchains and the rest of the external environment. They ensure the integrity of data that will be stored in the ledger system of the blockchain and provide a basis for verification and call-back abilities before smart contracts are executed.
Not Your Standard Oracle
The oracles that Morningstar will use to move ratings will be a lot smarter than the standard oracle. They will be able to draw data from various data providers and will also have execution capabilities. In one scenario, debt will be converted into tokens and offered to investors so that be purchased directly off the blockchain. It will run within one ecosystem as the oracle will be able to hand over the data from the debt owners to the smart contract execution mechanism seamlessly.
This, of course, will make things easy and Morningstar already has the right set of people for such a process. Its $669 million purchase of rating firm DBRS gives the leverage for implementation. Already, Brawer has indicated that DBRS employees will be joining the process.
The second scenario involves providing access to the quantitative models that Morningstar uses to make decisions on its ratings. The results of the models (not the models themselves) would be made available on a public blockchain for investors to use the data provided to test investments for themselves directly. The access to the blockchain would be fee-based to cover operational costs.
Out of the two, the second scenario will bring in fresh inflows for the agency. This, of course, will enable investors to build their models and will enhance investment decisions thus mitigating the risk associated with debt securities. This will lead to smaller products that are cheaper to access and will enhance the industry by creating profitable models that are profitable.
Already, the fees from custodians and trustees would be reduced to the smallest fraction or eliminated as far blockchain technology is implemented in the debt securities market.