Securitisation in the era of Blockchain: Credit funds, CLOs, Tokenisation, and the question of investor protection and financial stability

Abstract

This paper deals with the increasingly popular product of credit funds and their interaction with the securitisation mechanism while adding the complexity that the use of Blockchain technology can cause. The paper starts with setting the scope, namely the facts and elements that will be analysed through the paper and the reasons behind this analysis. The financial crisis and its outcomes created a need for alternative financing sources. This led to the emergence of new alternative lenders with the most popular being credit funds. The securitisation mechanism and its products can also contribute to the alternative financing of the EU markets and the use of tokenisation through Blockchain can create even more financing and risk-spreading channels. After setting the scope and introducing the reader to the topic, the paper continues by introducing the new product of credit funds. The size and the number of credit funds in the EU are presented and the different strategies and structures of credit funds are analysed. Finally, the different risks that are involved in the lending business of credit funds are assessed. The next part covers the securitisation mechanism, and it presents the structure of the securitisation process and the tranching concept. The size of the European securitisation market and its evolution from the Global Financial Crisis era is also presented, while the part closes with the debate on the differences between a credit fund and a Securitisation Special Purpose Vehicle. The next part of the paper deals with some lending products which are pertinent in the lending market, namely the Collateralised Loan Obligations (CLOs), the Schuldscheine, and Corporate Bonds. After finishing with the two basic elements of the paper, then blockchain technology and tokenisation as a process is introduced. The main elements of the new technology are analysed and then the paper starts the discussion on the credit fund’s role in securitisation and their interplay with tokenisation and its risks. The biggest threat that tokenisation and securitisation pose to financial stability is the risk that if tokenisation is adopted more broadly, it might create the presumption that there might be liquidity in inherently illiquid assets (like loans or real estate). This risk might affect the financial stability due to the liquidity mismatches between the token and the underlying assets, or where investors have limited information and understanding of the underlying products used for the token launch. As with every financial innovation, the risks of the tokenisation of CLOs can be mitigated by regulation. The paper analyses the main regulatory tools, such as the AIFMD, the EU Securitisation Regulation, the MiCAR, the Regulation on Distributed Ledger Technology (DLT), the Prospectus Regulation and MiFID II. Although AIFMD, the EU Securitisation Regulation and the Prospectus Regulation/MiFID II can apply to the tokenisation of CLOs, this does not appear to be the case for MiCAR and the DLT Regulation. The paper then assessed the regulatory provisions of the applicable legislation and identified some inefficiencies. Finally, the paper closes with some suggestions and proposals on how the regulation of tokenised CLOs and tokenised securities could be more efficient.

Keywords: Tokenisation, CLOs, Debt Funds, Blockchain, DLT Regulation

JEL Classification: G23, K22, 016