Start-up FIC Network has brought its first digital corporate bond on a blockchain-powered web platform the company built specifically for fixed-income markets.
FIC has targeted fixed income in part because the sector is riddled with manual processes and inefficiencies that make it ripe for innovation, said Arturs Ivanovs, founder of FIC Network, whose backers include Boost VC and mid-size family offices. In addition, the global financial crisis took root in credit markets, whose products and trading protocols are often complex and opaque, the founder said.
Dealers, investors and issuers have no central market to find transaction prices and other identifying information about fixed-income. Blockchain technology, which creates a permanent public record of transactions, can help open opaque markets to public scrutiny.
“When I started researching blockchain and cryptocurrencies in 2014, I wanted to know how this technology could apply to the traditional economy, which can’t operate without healthy credit markets,” said Ivanovs. “Structured products are particularly interesting for us, because blockchain provides transparency into underlying assets and allows for more granular portfolio management.”
As an example, expected cash flows — future interest payments — could be split off from the structured product itself and transferred separately to an asset manager or dealer on the blockchain. Asset managers could then use the expected cash flows to better manage their portfolios or use the pricing transparency of FIC’s platform to value the underlying fixed-income assets of exchange-traded funds.
Ivanovs said the company is starting small to test its technology: its first digital corporate bond, issued by Capstone Intelligent Solutions, is a one-year, U.S. dollar-denominated private placement that pays a 5 percent coupon monthly.
An executive at a major investor in financial technology start-ups said FIC Network is one of a number of respected players that are building blockchain-enabled platforms to attract institutional users. “It’s a solid idea to develop an infrastructure that is specifically suited to one particular market,” he said. But the challenge is attracting a critical mass of users so the market can work effectively. The tech exec believes FIC Network is developing an innovative application of how 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 tech firm,” he said.
Some competitors are trying to tokenize bonds — essentially turn them into a string of characters — on the public blockchain. In contrast, Ivanovs said, FIC is creating infrastructure from scratch and will partner with banks and other players in the markets. “There’s a lot of talk about eliminating intermediaries, and establishing peer-to-peer markets. That’s not our point. We want to partner with the parties involved in the current markets, but make them 100 times more efficient and find them additional opportunities,” he said.
FIC Network’s service can list, settle and redeem any type of fixed-income deal, including asset-backed securities and hedging. In addition, trades will be settled instantly, trading and legal documents will be standardized, interest payments will be automated, and custody will be digitized through the platform.