China securitisation blockchain use growing – Fitch

The application of blockchain technology in securitisations in China seems to have proceeded at a faster pace than in other parts of the world, with multiple platforms developed independently, says Fitch Ratings. For the foreseeable future securitisation is likely to use blockchain for certain aspects of a transaction, as opposed to full or end-to-end blockchain, as the technology, laws and regulations develop.

Fitch said there are at least eight ABS transactions which reported using blockchain technology for part of the securitisation process. These transactions are not rated by Fitch and all but one of the eight transactions was privately placed. The exception is Jiaoying 2018-1, a CNY9.3 billion residential mortgage-backed security transaction issued by The Bank of Communications, one of the largest state-owned banks, using a proprietary blockchain Jucai Chain. In this case, both the collateral information and transaction information were reportedly uploaded to the blockchain platform and the transaction parties were able to perform due diligence on the chain.

Securitisations in China use permissioned blockchains, in which access to loan-level origination and repayment data is made available to transaction parties based on each party's role and authorizations. The technology is mainly used so far for recording and verifying asset data and cash flows.

For some transactions, assets are selected for the securitisation according to eligibility criteria written into blockchain smart contracts. Since most of the bonds issued by transactions that use blockchain are privately placed, information on the use of blockchain and whether blockchain is used in a true transactional way, or if it is used as an electronic data repository, is not readily available.

“The government's recent vocal support of blockchain technology will likely accelerate its development and application across the financial spectrum,” said Fitch. “The China Banking Association launched the China Trade and Finance Interbank Trading Blockchain Platform at YE 2018, which is intended to provide standardization of trade finance information among the signatory banks and facilitate information sharing. Twelve large commercial banks, plus some medium and small banks, signed on to use this platform. While Chinese regulators issued regulations regarding management of blockchain information services, there are no specific regulations regarding the use of blockchain in securitisation. Blockchain platforms developed by state entities may help inform future regulations.”

Similar to blockchain use in securitisation elsewhere, blockchain use in Chinese securitisations has the potential to promote data transparency and transactional efficiency. “The immutability of data records on blockchain helps to reduce errors as data is not transferred between parties in the traditional sense but is commonly available on a shared platform,” said Fitch. “However, issues such as data ownership, transfer of the asset/title, and security enforceability will need to be addressed before the technology becomes more widespread.”

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