Securitisation The evolution of blockchain for asset-backed securities

A securitisation transaction is simply the trading of a security token from issuer to investor. By creating a token that is backed by real-life assets, issuers are able to create a standard investment instrument that can be sold.

In its most simplistic sense, there are two major steps in the securitisation process:

• Step 1: A company with assets (the originator) pools any assets it wants to remove from its balance sheet into a reference portfolio. Assets are then sold to an issuer.
• Step 2: The issuer turns these assets into tradeable security tokens that are sold to capital market investors.

Securitisation involves raising funds using asset-backed security tokens. Theoretically, any financial asset has the ability to be securitised, i.e. changed into a tradeable item of monetary value. Assets such as loans, mortgages and company shares can be securitised in this way.

Securitisation has a number of benefits for all involved parties, and with the addition of blockchain, regulation and safety are higher than ever. It enables companies to turn illiquid assets into liquid ones, and opens up opportunities for even small investors who may previously have been unable to participate, as a security can represent just a fraction of an asset.

Securitisation was first invented amongst banks in the U.S. in 1970’s, when they began securitising home mortgages. This was done to provide banks with a relatively secure way to distribute more mortgage loans to new homeowners. Securitisation extended to other types of assets on Wall Street in the 1980’s.