Vanguard Ran Its Digital Asset-Backed Securities Pilot in 40 Minutes
Vanguard and a handful of high-profile players are piloting ways to record the entire lifecycle of an asset-backed security on a blockchain. Here's why.
The full life of a digital asset-backed security (ABS) on a blockchain can be settled in 40 minutes versus the 10 to 14 days it would take in a paper-based setting.
That was the outcome of a pilot first revealed June 11 by mutual fund giant Vanguard in partnership with blockchain startup Symbiont, Citi, BNY Mellon, State Street and an unnamed ABS issuer.
The goal of the project: to see if the decades-old Wall Street practice of repackaging contractual debt – be it car loans, mortgages or credit card debt – into bonds sold to investors, known as securitization, can be simplified.
“The overall goal is to make the car more affordable to more people,” Warren Pennington, the head of Vanguard’s Investment Management FinTech Strategies Group, told CoinDesk in an interview. “Give ABS issuers more liquidity so they can reinvest in their business, in new car loans, and help make the market for cars more efficient.”
While the pilot didn’t involve a real-world transaction, Vanguard oversaw a process that included several moving parts: packaging car loans into a special purpose entity that houses them, pricing through multiple different parties and an investment bank, working with a trustee to take care of the entity and the custodian to hold the asset and providing information to investors who want to buy or sell based on that information.
In a real-world transaction, the ABS issuer would figure out how to package loans based on loan level detail, and to work with investment banks on temporary and permanent financing. Lawyers would also have to oversee the creation of the entity.
“Every step of the way it’s very manual, it’s very disjointed,” Pennington said. “There’s a loss of information along the way. Investors would like to be able to see as much of the detail as they can behind the ABS.”
Smith said Citibank acted as the investment bank, taking the issuance and distributed it directly to the investor, which was Vanguard. The custodians in the pilot, BNY Mellon and State Street, allowed smart contracts to execute autonomously and used a multi-signature approach to confirm the transfer of the instrument. Each of the financial institutions also operated a node on Symbiont’s Assembly blockchain to ensure consensus.
Overall, phase one of the pilot included creating a new digital ABS issuance and recording the entire lifecycle of the security. Symbiont doesn’t tokenize securities; rather, it focuses on issuing securities that are native to blockchain.
When the next ABS issuer that Symbiont is integrated with is ready to issue a security, the company plans to go into production with the product, said Symbiont CEO Mark Smith.
“The limiting factor at the moment is the cadence of the issuer,” he said. “This particular issuer may not have another issuance this year. We have other issuers in the pipeline and the speed in which we can get them onboarded and to be able to do a live transaction will be dependent on their ability.”
While Vanguard is one of the major asset managers working with Symbiont, Smith couldn’t comment on whether the mutual fund giant or another financial institution would be leading the live transaction.
Starting with ABS issuance allows Vanguard to target over-the-counter (OTC) markets and also eventually work towards a future of digital loans, Pennington said.
“There’s an opportunity to extend this out to the origination of the actual loan,” he said. “Then it’s a matter of collecting the digital loans and wrapping them into an entity.”
Vanguard has been working with Symbiont since 2016 and first put the startup’s Assembly blockchain into production in February 2019 in a data distribution project for passive index rebalancing, Smith said. (Assembly is powered by the BFT-SMART consensus algorithm, a solution the company says is more private and has faster transactions times than the Bitcoin blockchain.) The project allows index data to move instantly between index providers and market participants.
Symbiont is also developing a trading platform with Vanguard to lower transaction costs for the $6 trillion currency market. (The digital ABS pilot was the first time Symbiont had worked with State Street, a custodian bank that’s currently researching digital asset custody but has pivoted from re-plumbing the back office with distributed ledger technology.)
In the digital ABS pilot, the participants did a “shadow issuance” of a real asset-backed security, Smith said.
In past efforts prior to this month’s announced pilot, Vanguard had already created a digital ABS on blockchain and moved cash between participants on-chain.
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