Tokenization of Non-Performing Loans: Will It Work to Increase Efficiency and Liquidity?

1 min read

  • BlockInvest partners with Centotrenta Servicing and Davis & Morgan to tokenize non-performing loans (NPLs) and mortgages, utilizing Polygon blockchain, tapping into Italy’s €300 billion NPL market.
  • Tokenization aims to increase efficiency and liquidity by lowering costs and enabling fractional ownership, with blockchain technology tracking loan status and recovery processes.
  • The initiative, part of the Bank of Italy’s Fintech Hub, offers potential high returns but carries significant risks, highlighting the need for professional financial advice before investing in such distressed assets.

By Ledger Insights

Italy’s BlockInvest announced plans to tokenize two different sets of non performing loans (NPL). It is partnering with asset backed security (ABS) firm Centotrenta Servicing to issue tokenized securities backed by non performing loans. Separately, it is partnering with a small bank Davis & Morgan to tokenize non performing mortgages. Both sets of tokens will be issued on the Polygon public blockchain.

Meanwhile, BlockInvest is backed by Credit Agricole Italia. According to BlockInvest, Italy has €300 billion ($327 billion) in non performing loans, so there’s plenty of market potential.

There are several drivers of tokenization. One is the efficiencies resulting in lower costs, making smaller issuances or denominations possible. This so-called fractionalization has the potential to improve liquidity. 

At its core, blockchain is a ledger or database. So it can also record the status of the individual non performing loans and the recovery process.

Testing the Waters

The first project with Centotrenta Servicing is to natively tokenize the ABS portfolio of NPLs on a blockchain. Subsequently, the tokenization solution could be offered to CentroTrenta’s clients. Since its formation, Centotrenta has issued more than 250 securities via special purpose vehicles representing around €21 billion ($23bn) in assets.

Back in 2020, Centotrenta Servicing was involved in a tokenization project with IBM and BNP Paribas. Another Italian non performing loan tokenization initiative was executed in 2021 with SIA and blockchain fintech Wizkey.

Meanwhile, the second BlockInvest project involves the Davis & Morgan NPL mortgage project, which was selected as one of 14 initiatives as part of the Bank of Italy’s Fintech Hub on tokenization. As part of the same Hub, BlockInvest worked with Credit Agricole Italia on a tokenized bond solution.

Tokenization & asset backed securities

Last year, the BIS published a report that showed that tokenizing ABS provides significant benefits. The average yield spread in the study was 79 basis points (0.79%) and tokenization narrowed the yield spread by 25 basis points (0.25%) on average. Yield spreads are frequently used as a surrogate measure for liquidity. The more liquid an asset, the narrower the spread.

See source article HERE