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Start-ups FIC Network brought its first digital corporate bond on a blockchain-based web platform, built specifically for fixed income markets.
FIC has targeted fixed income in part because the industry is full of manual processes and inefficiencies that make it ripe for innovation, said Arturs Ivanovs, founder of FIC Network, whose supporters include Boost VC and medium-sized family. Furthermore, the global financial crisis has taken root in credit markets, whose commercial products and protocols are often complex and opaque, said the founder.
Resellers, investors and issuers do not have a central market to find transaction prices and other identifying information on fixed income. Blockchain technology, which creates a permanent public record of transactions, can help open opaque markets to public scrutiny.
"When I started looking for blockchain and cryptocurrencies in 2014, I wanted to know how this technology could apply to the traditional economy, which can not operate without healthy credit markets," said Ivanovs. "Structured products are particularly interesting for us because blockchain guarantees transparency in the underlying assets and allows for a more granular portfolio management".
For example, expected cash flows – future interest payments – could be split from the structured product itself and transferred separately to an asset manager or a retailer on the blockchain. Asset managers could then use the expected cash flows to better manage their portfolios or use the pricing transparency of the FIC platform to assess the underlying fixed income assets of exchange traded funds.
Ivanovs said the company is starting to test its technology: its first corporate digital bond, issued by Capstone Intelligent Solutions, is a one-year private placement, denominated in US dollars, which pays a 5% coupon to the month.
An executive of an important investor in financial technology start-ups said that FIC Network is one of the many esteemed players who are creating blockchain-enabled platforms to attract institutional users. "It's a solid idea to develop an infrastructure that is specifically tailored to a particular market," he said. But the challenge is attracting a critical mass of users so that the market can function effectively. The technical manager believes that FIC Network is developing an innovative application of how the blockchain can be used in financial services. "In the end it will be a race to see whose model wins, with competitors and their users rolled up by a large technology company," he said.
Some competitors are trying to turn the ties – essentially turning them into a string of characters – into the public blockchain. On the contrary, said Ivanov, FIC is creating an infrastructure from scratch and will work with banks and other players in the markets. "We are talking a lot about the elimination of intermediaries and the creation of peer-to-peer markets, which is not our point: we want to collaborate with the parties involved in current markets, but make them 100 times more efficient and find further opportunities" , he has declared.
The FIC Network service may list, settle and redeem any type of fixed income contract, including asset-backed and hedged securities. In addition, transactions will be resolved immediately, legal and negotiation documents will be standardized, interest payments will be automated and custody will be digitized through the platform.
