Cadeia and Bank Frick launch first fully blockchain-based loan securitization

7 December 2021 — Together with Bank Frick, blockchain pioneer from Liechtenstein, Cadeia has carried out the first-ever fully blockchain-based corporate loan securitization transaction, GreyPeak 2021–1. As of today, the professional use of blockchain technology in the context of securitization transactions enables more cost- and time-efficient as well as transparent and secure processing. In the end, this benefits not only banks and financial intermediaries, but ultimately also the real economy, including Small and Medium Enterprises (SMEs).

Author: Constantin Ketz, Co-Founder (c.ketz@cadeia.co)

The first capital markets transaction on Cadeia’s Digital Services Platform (DSP), GreyPeak 2021–1, is also the first securitization transaction globally that is settled entirely on a blockchain. The complete transaction, including securities issuance and settlement, ongoing covenant testing, and rule-based cash flow management via predefined waterfall structures, is processed through a series of automatically created smart contracts on the Ethereum blockchain.

The large degree of automation in this fully integrated end-to-end loan securitization allows to cut costs and time by reducing manual and error-prone workflows, and by providing a common database for all transaction stakeholders. In this way, Cadeia enables banks and financial intermediaries, to execute securitization transactions with smaller volumes, which improves their ability to manage risks and liquidity. Improved risk and liquidity management possibilities, in turn help banks to originate new loans more easily to their clients, like for example Small and Medium Enterprises (SMEs), and thus contribute to a better financing situation for the economy as whole.

In this first transaction, traditional unsecured corporate loans of Bank Frick were securitized. The Bank is acting as originator and servicer. The transaction, denominated in Swiss francs (CHF), is structured in 3 tranches (senior, junior and equity), which were privately placed in the form of digital securities — Asset Backed Security Tokens (ABST).

The three token tranches are identified by International Token Identification Numbers (ITINs) provided by the International Token Standardization Association (ITSA) and can be viewed and analyzed via these identification numbers in ITSA’s token database (https://api.itsa.global/search-tokens):

  • GreyPeak 2021–1 — Senior Tranche (ITIN: K4X0–8WXC-1)
  • GreyPeak 2021–1 — Junior Tranche (ITIN: 83J0-T6TD-0)
  • GreyPeak 2021–1 — Equity Tranche (ITIN: TC95-C438–9)

In contrast to previous blockchain-based securitization transactions, where smart contracts have so far been used solely to tokenize receivables or securities, i.e. to digitally map them as securities, this transaction goes much further in technological terms. This is because Cadeia also uses smart contracts for the automated and rule-based control of cash flows in accordance with the previously agreed transaction conditions (covenants) and the associated cash flow waterfall structures. In this way, interest and principal payments from the securitized loans are calculated depending on the transaction performance and get allocated to the holders of the digital securities.

Since no CHF-denominated Central Bank Digital Currency (CBDC) or trustworthy and widely adopted CHF stablecoins exist yet, the smart contracts access the classic transaction bank account directly via a PSD2 interface and initialize the transfer of the automatically calculated payout amounts to the investors’ bank accounts in every payment period. For this purpose, the bank account of an investor is linked to their token wallet — the digital securities account — in order to guarantee a secure payout allocation at all times. Such a PSD2 interface solution can be used in both, SWIFT and SEPA payment systems, and with different currencies. For the future, however, Cadeia builds on stablecoins and CBDCs, which will enable an even more efficient processing.

Cadeia’s platform-based solution not only reduces settlement times and transaction costs, but also allows for improved coordination and immediate monitoring of a transaction by all transaction participants, including rating agencies, auditors and regulators. Security and transparency are achieved throughout the whole lifecycle of a transaction by means of complete documentation, automated audit trail generation, and provision of real-time data.

The versatile platform can process assets and investment products in both traditional and tokenized form. Furthermore, cash flows can also be managed in the traditional SEPA or SWIFT payment system as described at the beginning of this article, as well as entirely on chain via stablecoins. Overall, Cadeia’s blockchain-agnostic Smart Contract Engine (SCE) enables the transparent implementation of complex financial products and transactions through smart contracts, including complex elements such as covenant or trigger tests as well as cash flow waterfall structures.

Rolf Steffens (Managing Director, Cadeia) emphasizes the groundbreaking nature of the transaction: “GreyPeak 2021–1 is the first loan securitization to fully store and execute the complex terms and processes of a securitization transaction in a blockchain. The Cadeia DSP system and the associated Smart Contract Engine enable users to implement complex financial transactions in a transparent, fast, secure and traceable way over the long term, regardless of whether assets or refinancing instruments are already tokenized or not. This opens a new chapter in the history of rapidly evolving DLT usage for originators and investors. We are very pleased with the smooth collaboration with Bank Frick as well as the trust placed in us for this first transaction.”

Julian Gretzinger (Head of Capital Markets, Bank Frick) also appears delighted with the jointly achieved milestone: “With this transaction, Cadeia demonstrates impressively, how to initiate real progress that adds great value to the financial industry. It is exciting to see that our early investment in Cadeia has already resulted in a first innovative transaction. We look forward to continuing our thoroughly professional collaboration with the team and are already very excited about upcoming transactions.”

Prof. Dr. Philipp Sandner (Chairman, International Token Standardization Association (ITSA)) added: “We are very pleased about having been able to support our member company, Cadeia, in this major step with our market standards. The collaboration allowed us to demonstrate both our approach to the technical identification of individual tokens within multi-token contracts on Ethereum, as well as to test the generalist functionality of our International Token Classification Framework on financial products that are novel in the blockchain world. We are already looking forward to Cadeia issuing more complex financial products.”

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About Cadeia

Cadeia (www.cadeia.co) is a financial technology company with the vision to make global capital market transactions and financial products more secure and efficient for both, issuers and investors. Based on novel distributed ledger technologies, Cadeia develops and operates a digital platform for the efficient structuring, issuance and settlement of complex financial products (e.g. asset-backed securities, syndicated loans, or bonds) as well as the automated and rule-based distribution of the related cash flows. The offering aims at banks, asset managers, insurance companies and pension funds, among others.

About Bank Frick

Bank Frick (www.bankfrick.li) specializes in banking for intermediaries. The Liechtenstein bank provides a fully integrated offering of classic banking and blockchain banking services. Its clients include in particular fintechs, asset managers, payment service providers, family offices, fund promoters, pension funds and fiduciaries. Bank Frick has been family-run since its foundation in 1998 and adopts an entrepreneurial approach. The Bank employs over 170 members of staff at its Balzers office and operates a branch in London, UK.

About ITSA

The International Token Standardization Association (ITSA) e.V. (www.its.global) is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics, as well as the world’s largest register for tokens, TOKENBASE.

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Cadeia

Cadeia

Cadeia offers a digital platform for complex financial products, defining a radically new way of deal structuring and execution for issuers and investors.