Morningstar Develops Blockchain Platform for Debt Securities

The credit rating arm of financial services giant Morningstar is developing a blockchain platform for the $117 trillion debt securities industry.

Morningstar Credit Ratings is building an evaluation system for debt securities issued as tokens on a blockchain, Forbes reports on Oct. 2.

Michael Brawer, COO at Morningstar Credit Ratings, stated that the firm is working with a number of blockchain-oriented firms who are seeking to issue debt instruments on a blockchain. 

According to Forbes, Morningstar rates a wide range of assets based on their past returns to investors on a scale of one to five. The company reportedly started working with blockchain technology in June 2018, when Morningstar published a report on how firms like Bank of America, Apple and Walmart are using blockchain tech, and how it might affect credit ratings agencies’ coverage.

Two major blockchain efforts in debt securities

So far, Morningstar has been working on two major blockchain-based efforts in the debt securities industry. One of them intends to put Morningstar’s system for rating bonds directly on the Ethereum blockchain via a technology called an oracle, the report notes. 

Oracles move data onto a blockchain in a way that ensures the data is not manipulated and therefore makes it eligible to be used in a smart contract.

The second project involves making quantitative rating models for debt securities available on a blockchain. Credit agencies use said models to determine the creditworthiness of different types of debt securities.

According to Brawer, the smart oracles project could be ready as soon as the end of 2019, but the blockchain modeling project might not be ready for launch until the end of 2020.

The potential partners for Morningstar’s product reportedly include blockchain-focused startup Figure, Coinbase-backed alternative investment provider Cadence and decentralized finance platform Polymath.

Meanwhile, it is still unclear whether Morningstar’s blockchain methodology needs to be approved by the United States Securities and Exchange Commission (SEC), the report notes. Brawer said that there is a very elaborate and intricate governance process which is all based on the Dodd-Frank law and SEC regulations.

In July, blockchain-based alternative investment provider Cadence launched an investment platform for debt.