The rating arm of financial services giant Morningstar, Morningstar Credit Ratings, is reportedly planning an evaluation system for debt securities issued as tokens on a blockchain.
The firm’s move, according to an interview Forbes conducted with Morningstar Credit Ratings’ chief operating officer Michael Brawer, could make the emerging asset class more credible for investors.
Morningstar’s new rating services could, according to Brawer, allow the $117 trillion debt securities industry to move to a decentralized financial network, instead of being administered and governed by trustees and custodians.
Morningstar’s services will include a publicly available rating of cryptoassets between one and five stars, and a premium service that helps clients evaluate their potential investments. This would also mean the cryptocurrency space would become more credible, potentially bringing in billions of dollars of investment.
The financial services giant’s bond-rating system is reportedly going to be placed on the Ethereum blockchain, and could soon be placed on others as well.
Brawer noted Morningstar is “working closely with a number of blockchain-oriented firms who are looking to issue debt instruments on a blockchain.” He was quoted as saying:
We're looking to see how we can also provide credit opinions, whether it’s a credit rating or different types of credit data and credit analytics that accompany those debt instruments, and we’re also looking to provide our services on a blockchain.”
The financial services giant reportedly realized there was demand for a ratings service in the cryptocurrency space after it was approached by investors that issue and securitize debt securities.
Using blockchain technology, Morningstar’s services are not only going to take advantage of more security and convenience, they’ll also reportedly directly connect investors and borrowers, saving between 25 and 500 basis points in fees by eliminating custodians and trustees.
Brawer noted, however, that while blockchain startups have potential, they’re still in an early stage: He said:
I don't think blockchain startups are at the point where they would say they can eliminate the custodian, but they would like to start to chip away at some of the custodian's responsibilities. I don't think anyone is pretending at this stage that they can eliminate the role of the trustee either. But they’re starting to chip away at that too.
The Morningstar executive added that it isn’t clear whether the firm’s existing methodology will be sufficient for its services to comply with the Securities and Exchange Commission’s regulations, or if there’ll be a need for an “enhanced” blockchain methodology.