Building Fixed-Income Bonds on the Blockchain

Fixed-income assets have yet to truly take hold on the blockchain, but the potential is huge. Some estimates place the global credit market at three times the size of the world’s equity markets.

FIC Network is creating a blockchain ecosystem for fixed-income assets including loans, corporate bonds and other asset-based securities. Having just completed a presale of its utility token, FIC is preparing to launch its mainnet in the coming weeks, followed by a public token sale.  

ThirtyK spoke with Arturs Ivanovs, the founder of FIC Network, about the importance of fixed income in crypto investment and what capital markets need to take blockchain seriously. Before launching FIC Network in 2016, Ivanovs was involved in fintech regulation in the European Union. He also serves as an adviser to Turing Funds, an exchange-traded fund of cryptocurrencies.  

Connecting Companies

ThirtyK: What do you see as the major problems with fixed-income markets?

“The world is becoming more and more flat. A lot of companies realize that the intermediaries we need to deal with on a daily basis are slowing us down as entrepreneurs.,” says Ivanovs.

Ivanovs: One of the major problems that precipitated the financial crisis of 2008 was the lack of transparency in the market. On the blockchain, investors have access to granular data behind even a single mortgage, up-to-date information about the quality of repayments or credit scores. It doesn’t matter whether the instrument is two days old or 10 months old, you can always verify the information.

Another challenge is access to markets. A lot of small companies don’t have access to high-quality buyers because the transaction costs are too high. Look at Elon Musk [founder of SpaceX, co-founder of Tesla]. He had to wait until he had billions of dollars before he could build a rocket.

There’s also a large opportunity in the corporate bond market to connect companies that have a solid financial situation and need capital to expand their operations.  

We want to create a platform on blockchain that allows companies to raise money from around the world without intermediaries such as transfer agencies, custodians, brokers-dealers and all the [associated] fees.

ThirtyK: In FIC’s white paper, you say a key issue with cryptocurrency is that it has no opportunities for fixed income investment. Why is that a problem?

Ivanovs: Every developed economy needs healthy credit markets, the ability to lend with interest to entrepreneurs who want to build something.  

As crypto markets mature, a lot of companies will be willing to raise capital if it’s stable enough. On the other side, there’s this vast number of individuals and organizations who hold a lot of cryptocurrency in wallets. If your crypto is in your wallet, it doesn’t [accelerate] the overall economy, just like holding dollars in your wallet doesn’t either.

We’re trying to build an infrastructure for people to invest their crypto into interest-generating products — corporate bonds, asset-backed securities, and loans.  Capital is spread across the world. It’s hard to reach Japanese investors if you have a company in Brazil. There’s a vast number of investors who have accumulated wealth but don’t have the means to invest it, and a network of companies who would be able to raise money to expand their operations.

1,500 Transactions Per Second

ThirtyK: How do you compare yourselves to other players in the space, including established financial institutions?

Ivanovs: We are building something from the ground up for the capital markets. We’re one of the first ones to tackle this issue, and we have the upper hand in the way we have structured our governance around the blockchain.

ThirtyK: What about your governance structure is suited for capital markets?

Ivanovs: It feels like everyone is working on ethereum (ETH) and its complicated smart contracts language. I’ve been vocal that capital markets don’t need a sophisticated Turing-complete programming language. What they need is high throughput transactions. Our blockchain can go up to 1,500 transactions per second in some tests, with 1,000 easily doable, and higher if we implement a lightning network. That beats ethereum right away.

We will be publishing the majority of the [blockchain] code open source, and anyone can participate in that and build something else on top of it. [At the same time], we’re developing proprietary platform-level [features] that will allow us to whitelist who can participate in this market. At first, it will be us as a company that will be the authority that will issue the participation asset token if the company is legitimate. Our token is not backed by financial instruments, and these financial instruments are not backed by the token. It’s a service fee token that is used to work with our platform.

[The platform] also will allow companies to manage their [account] keys for different traders…so if a trader has a portfolio of $100 billion and he loses the key or it gets corrupted, it’s possible to recover or block it right away. We expect this would be a main differentiator in this space.

In the corporate world, it’s important to be compliant and have these structures in place. That’s something people don’t understand. They think the code will save everything. Companies don’t rely on code, they rely on people.

Regulation

ThirtyK: What about regulatory agencies and regulations?

Ivanovs: We believe the transparency would help regulators to oversee this space. There’s a role for regulators to have the ability to look at transaction details if needed.

In general, I think that now the regulatory environment is uncertain for security and utility tokens, so it’s obviously a question where our first clients will come from. But we can meet compliance in the United States and outside it.

ThirtyK: What markets are you focusing on first?

Ivanovs: We have been building out the blockchain for lenders, especially the asset-based security market. We have had several tests running on distributed environments and had intense conversations with potential lenders. We’re also getting inquiries about tokenizing corporate bonds, and we’re currently hiring a couple of people for platform development for the corporate bond market.

ThirtyK: Your company has emphasized the importance of partnerships. What kinds of partners is FIC seeking?

Ivanovs: We need three kinds of partners: a ratings agency to evaluate products, an audit company and an investment bank to raise the capital. We’re in talks with a lot of potential partners. In addition, we’re looking for technology distribution partners that would promote and distribute our products across their client base.

ThirtyK: Why is the time right for capital markets to explore the blockchain?

Ivanovs: The world is becoming more and more flat. A lot of companies realize that the intermediaries we need to deal with on a daily basis are slowing us down as entrepreneurs. Everyone’s trying to build something like Airbnb and Uber that can disintermediate these large cost sectors.  We’re striving to enable entrepreneurs. A distributed environment for [fixed assets] is a perfect use case.