BoComm Unveils China’s First Blockchain ABS Platform “Ju Cai Lian”
BoComm unveiled “Ju Cai Lian”, China’s first blockchain-based asset-backed securities (ABS) platform covering all aspects of investment banking services, in June. The service transmits information of both ABS projects and assets via blackchain nodes set up jointly by BoComm, BoComm International Trust and professional agencies such as PwC, Zhong Lun, China Bond Rating and CCXI, proceduralizing smart-contract-based due diligence involving multiple institutions and thus reshaping ABS business operations in the investment banking market.
The first batch of BoComm’s residential mortgage-backed securities (RMBS) underlying asset information was uploaded onto the blockchain network in July, and agencies kicked off RMBS-related due diligence operations on the network in the following month, allowing participants to access and retrieve relevant information via the blockchain so as to optimally ensure the authenticity of underlying assets and the validity of information disclosed.
The launch of “Ju Cai Lian” marks a major innovation by BoComm in applying fintech to revamp IB services. The platform effectively improves the transparency and standardization of ABS product operations, and demonstrates clear advantages in terms of lowering product financing costs, increasing operating efficiency and making full-cycle risk management more effective.
What are the benefits of reshaping ABS products?
In essence, ABS products are negotiable securities that involve repayment of principal and interest relying on anticipated cash flow derivable from a certain type of valuable assets. Separation of ABS assets and the original owners means that repayment of borrowed funds is entirely dependent on cash flow generated from the underlying assets, which is why regulators and investors have very demanding requirements for ABS issuers. An asset-backed security offering involves a number of steps ranging from asset screening, due diligence and product design to regulatory filing and sales.
The traditional ABS business has inherent drawbacks. First, information asymmetry. The authenticity of formation of underlying assets cannot be guaranteed due to the lack of transparency in due diligence, valuation and rating activities. Owing to deficiencies in the information disclosure mechanism for ABS products, serious information asymmetry exists between investors, managers, rating agencies and original owners when it comes to real-time changes in underlying assets (except “static” information disclosed upon securities offering), adding to difficulties in monitoring credit and liquidity risks and therefore in risk management. Second, objectivity cannot be guaranteed. As rating agencies are directly commissioned and paid by the original owners to issue initial and surveillance credit rating reports, it is hard to measure the independence and objectivity of the rating agencies and the outcomes. Third, mismatches between prices and risks. A reliable pricing basis is absent for transactions on the secondary market due to limited liquidity of ABS products. Furthermore, “anterior” and “posterior” ratings assigned to the products merely defines prioritization for repayment, rather than reflect their risk ratings, resulting in mismatches between the pricing mechanism and risks.
These drawbacks affect all parties involved in ABS deals – pushing up financing costs for original owners, entailing extra risks for investors and making agency services less efficient and market regulation less effective.
A blockchain is a distributed database featuring continuous data storage based on “block structures” maintained by multiple parties, where records and the sequence of record entries are protected using cryptographic techniques, making it almost impossible for any participant to tamper with the records or fabricate new ones. Ju Cai Lian offers a well-targeted solution to all these issues associated with traditional ABS systems.
This blockchain-based ABS platform connects the funding end with the asset end through a joint blockchain, and offers functionalities covering the entire lifecycles of ABS products. The blockchain technology makes credit risks easily detectable throughout the ABS business system. The platform redefines asset registration, due diligence, product design, sales and offering operations, and enables fast sharing and transmission of asset information by releasing real-time information of underlying assets on the blockchain, thereby guaranteeing the authenticity of underlying asset formation and effective real-time monitoring throughout the duration of asset-backed securities. By making project information assessable via the blockchain, Ju Cai Lian implements various processes in a more standardized and transparent fashion, offering an ideal solution to information asymmetry, lack of objectivity and pricing-risk mismatches inherent in traditional ABS models.
What are the benefits of using Ju Cai Lian?
As a blockchain-based platform, Ju Cai Lian has clear advantages in ABS offering and management operations.
More efficient business processes. Ju Cai Lian’s distributed workflow engine makes it possible for multiple institutions to work together within the joint blockchain, allowing them to collaborate with each other more efficiently.
Lower operating costs. Distributed ledgers offered by the blockchain mean that all participants have local access to all the data and can complete business operations using the blockchain smart contract based on clearly-defined rules and clear-cut authority and duties. This substantially reduces operational, compliance and reconciliation costs for participants, as well as bolstering investor confidence with real-time and reliable information verification and lowering bond rates and funding cost for original owners.
Transparent information covering the entire product lifecycle. Uploaded onto the blockchain, project and underlying asset information can be tracked and audited throughout product lifecycles with protection offered by the blockchain technology against tampering, making ABS transactions more transparent and standardized. Credit, liquidity and model pricing related risks are also effectively reduced as a result.
Easier business regulation. Regulatory authorities can implement “penetrative” regulation by arranging nodes along the blockchain, and monitor project and underlying assets information on a real-time basis, thus making regulation more efficient, effective and readily achievable.
What are the innovative features that Ju Cai Lian will offer in future?
New features planned for Ju Cai Lian include functionalities covering all aspects of the investment banking ABS business, ranging from asset screening, due diligence and product design to sales and offering and duration management, as well as intelligent analytic tools for risk pricing, cash flow analysis and stress tests.
The IB research and development team of Ju Cai Lian is working on a set of configurable product templates designed to expedite offering of various ABS products, and their flexible upgrade mechanisms make them readily adaptable to changes in market conditions and policies. The templates are suitable for such credit ABS products as credit card installment, housing mortgage, corporate loan and non-performing loan and corporate ABS products including microfinance, accounts receivable, trust usufruct and rentals.
Ju Cai Lian is not only a general IB service platform, but also an open, shared and reliable investment banking business ecosystem that uses fintech to drive IB market transformation, connecting investment banks involved in ABS transactions to seamlessly integrate business processes and databases. The ultimate goal is to create a new community bonded by a common fuure.
This year, BoComm has achieved many “firsts” in blockchain technology applications. From the debut of China’s first blockchain-based domestic letter of credit in April to the successful launch of the first phase of Ju Cai Lian, the bank has consistently diversified use cases for blockchain applications. Following the introduction of a new-generation smart transformation program (dubbed Program “531”) on May 31, a market insider noted, BoComm would likely step up its efforts to innovate existing services amid effective fintech applications.