Summary and Key Takeaways

1. Moody’s issues AA rating to tokenized Singapore dollar bond fund on Standard Chartered’s Libeara Platform

One of the most notable headlines from Q2 2023 was Figure achieving the first Morningstar-rated on-chain HELOC securitization. As products become more and more digital and globalized in nature, transparency, ratings, and proof become even more essential. For traditional buyers and players to take tokenized products seriously and feasibly include them in portfolio allocations, ratings will play a key role in building that comfort.

This past week, Moody’s issued its first rating of a tokenized product, issuing a AA rating to the SGD Delta Fund tokenized on Standard Chartered Ventures (SC Ventures) Libeara platform. The press release notes, “Despite the underlying assets boasting a AAA credit quality, Moody’s decision reflects caution due to the fund manager’s limited track record in managing unit trusts with similar strategies.” Notably, the lower than expected rating was not entirely due to the blockchain involvement (these fund interests are recorded on the Stellar and Ethereum blockchains), but rather on FundBridge Capital’s limited track record as a fund manager coupled with Libeara’s newness as a technology platform itself, more so than the usage of public blockchains from a record keeping perspective. As assets continue to onboard onto blockchains and global regulators help drive the mission, these types of knee-jerk reactions will begin fading away.

2. Ondo Finance secures partnership with digital assets market maker Wintermute for Ondo’s US Dollar Yield stablecoin (USDY)

Wintermute is a cryptocurrency market maker and liquidity provider that’s accounted for $3.5 trillion of volume to date across 50 digital asset marketplaces. One of the key hindrances in the tokenized asset secondary markets has always been a lack of the promised liquidity. Ondo Finance is yet again making headlines in this industry for building some of the necessary partnerships and infrastructure agreements to that regard. Having first built up Flux Finance for users and investors to borrow against and lend their on-chain treasury bond funds (OSUG), Ondo now leverages Wintermute’s OTC execution and market making services in its Ondo US Dollar Yield (USDY) token, which is a ​​tokenized note secured by a bankruptcy-remote portfolio of US Treasuries and bank deposits offered to international (non-US) and institutional investors.

Investors can now buy and sell USDY in bulk via Wintermute’s OTC desk - a strong improvement on individual swaps and trades. To me, this partnership opens the doors to much larger block orders, trades, and more meaningful entrants into the market specifically using USDY and Wintermute as the door. Wintermute’s own clients across exchanges, broker-dealers, and even other digital asset issuers will likely have a direct route to USDY to bolster its own trading pairs, reserves, and product offering as a result. While we still haven’t seen these sorts of partnerships or market making agreements on Alternative Trading Systems (ATS), this is certainly a key precursor in the maturity of the real-world asset market. Kudos to the Ondo Finance team for executing this agreement in just under a full year from the launch of its inaugural products.

Details on USDY are listed here from the original launch release in August 2023:

“USDY is senior secured debt issued by Ondo USDY LLC, a US-domiciled specialty purpose vehicle, managed by a Board including an independent director, and designed to maximize bankruptcy-remoteness. USDY is over-collateralized by a roughly 3% first loss equity position that absorbs short-term fluctuations in US Treasuries prices.

Ankura Trust will serve as the Verification Agent and Collateral Agent to USDY in accordance with the underlying governing documents. Ankura Trust will post daily reports starting 60 days after launch that will provide transparency into the assets of the issuer for the benefit of lenders. As Collateral Agent, Ankura will be prepared to seize the assets that secure the tokens and repay holders if Ondo was to cease operations or breach certain covenants of the debt, subject to approval from USDY holders. This structure ensures a degree of transparency and investor protection that traditional stablecoins lack.”

3. ISDA Taking Tokenized Collateral Seriously

Any fans of The Big Short? Whenever I see or hear an ISDA reference, my mind immediately goes to the scene where Charlie and Jamie of the Brownfield Fund are ~$1.5 billion short of the bank’s capital requirements for their desired International Swaps and Derivatives Association (ISDA) contract. Anyway, ISDA published their thoughts and guidelines on tokenized collateral & swaps last week, which is yet another key validation piece in our industry. 

The report, formally focusing on “tokenized collateral model provisions for inclusion in ISDA 2016 Credit Support Annexes for Variation Margin (VM),” details scenarios under both English Law and New York Law for the two most common ISDA swap structures. The piece notes that it will designate digital assets as “DLT Cash” or “DLT Securities;” it also places an emphasis on “Local Business Day” and time given the global and 24/7 nature of our industry’s capabilities. Notably, ISDA amended its Model Provision to also account for DLT airdrops, presumably hedging its model for any future securities distributions via airdrop, taking a page out of the general digital assets market. We are not yet aware of clients or direct users of ISDA’ Model Provision with regards to DLT-based assets, although the list can extend to major banks, hedge funds, sell-side groups, and service providers as on-chain repo and collateral management continue to grow.

The final conceptual takeaway and points to consider here is the notional value of derivatives and the gross value are $700 trillion and $20 trillion, respectively. While there are not true derivatives on tokenized assets yet (excluding DeFi protocols that  may offer futures or swaps on cryptocurrencies), the entrance of these products will cause the tokenization and real-world asset industry to skyrocket, much like it has in legacy financial markets and more recently in digital assets.

Notable Market Headlines

• 1/8/2024 - DigiShares and Custowner® Mobility Partner to Innovate Sustainable Urban Mobility Through Asset Tokenization

• 1/4/2024 - Green-X Lists Tai Shan Digital’s Innovative Ceramic Asset Token “TS1”

• 1/4/2024 - CREDER Launches First Gold-Pegged Coin on Klaytn

• 1/4/2024 - ECB issues digital euro vendor call for up to €1.1 billion in contracts

• 1/3/2024 - Derivatives body ISDA updates master agreement for tokenized collateral

• 1/2/2024 - Advancing the Frontiers of Blockchain and Tokenization with WISe.Art and SEALCOIN

• 1/2/2024 - Hong Kong launches stablecoin regulation consultation

Institutional Activity

• 1/5/2024 - Adhara wins Bank of Spain contract for wholesale CBDC, tokenized deposit trials

• 1/4/2024 - Wintermute and Ondo Finance announce strategic partnership to strengthen liquidity in USDY

• 1/4/2024 - Moody’s rates first fund on Standard Chartered tokenization platform

• 1/3/2024 - Bain & JP Morgan Private Fund Tokenization Summary

Upcoming Success Network Events

• Office Hours with Herwig Konings - Monday January 8th at 3pm EST

• Weekly Industry Updates Breakdown - Tuesday January 9th at 3:30pm EST

• Weekly Networking Happy Hour - Thursday January 4th at 4:30pm EST

Recent Recordings

• Project Guardian: Future of Wealth Management (Recording Link)

• Tokenizing a $4B Real Estate Portfolio with RedSwan (Recording Link)

Hello members,

We’re seeing an interesting tug and pull from the ratings agency side of things. Morningstar specifically rated FAT brands debt offering a few years ago a higher grade because they were using Ethereum citing enhanced transparency for the agency’s reasoning. However, for the first time we have now seen another rating agency come out against the use of a blockchain, specifically a public blockchain. The reasoning from Moody’s according to LedgerInsights was that there were “technological” and “governance” risks associated with using a public blockchain. Still, it’s unclear whether that weighted more than some of their other considerations like the lack of track record of the fund manager and the lack of activity that has gone through StanChart’s Libeara platform. 

Ratings will continue to play an interesting role in this industry. On one hand, tokenization makes analyzing securities and debt instruments dramatically easier and more efficiently which  cuts into the competitive moat that rating agencies have developed. On the other hand, Moodys and Morningstar are not going anywhere and are already adapting and recognizing the role of the technology, even offering differing opinions. I’d argue that these firms are critical to the adoption of tokenization because the more rated tokenized offerings there are in the world, the more comfortable institutions (and all investors) can feel about investing in them and, thus, fostering adoption. As far as I know, this is the first rated tokenized fund in the world (at least by Moody’s) which I think is quite compelling! 

Maybe rating agencies will be sought out even more given the potential for new offerings in the market yet many, especially private companies, have little public information and even less verified information by third parties. This presents a huge opportunity in this industry.

Happy tokenizing,

Herwig Konings, CEO at Security Token Advisors

Helpful Resources

• TokenizeThis: Highlights and Key Takeaways - STM

• State of Security Tokens 2023 - Q3 - STA

• State of Security Tokens 2023 - Q2 - STA

• State of Security Tokens 2023 - Q1 Extended - STA

• Real-World Asset Tokenization 2023 According to STM - STM

• Tokenizing an Asset in 3 Easy Steps - Security Token Show

• Rich Data in Private Assets - STM

• State of Security Tokens 2022 - STA

• State of Security Tokens 2023 - Institutional Edition - STA

• Tokenization for Institutions - What You Need to Know - STM, Arca (YouTube)

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