blockchain technology holds notable promise for revolutionizing the issuance and management of covered bonds, offering enhanced operational efficiency and transparency. However, widespread adoption is currently hampered by a complex web of legal, technical, and regulatory hurdles, according to a recent analysis by Moody’s Ratings.
The report from Moody’s highlights how smart contracts could automate critical processes within the covered bond market, such as asset substitution. Furthermore, the real-time transaction data facilitated by blockchain could provide investors with greater visibility and potentially accelerate bond issuance timelines.
despite these potential benefits, Moody’s points out that current blockchain applications in this sector are largely confined to on-chain bond issuance. Essential functions like settlement and asset management continue to rely on customary, off-chain infrastructure. Consequently, a complete integration of blockchain technology into the covered bond market is not anticipated in the immediate future.
Key obstacles preventing broader adoption include the necessity of linking blockchain systems to off-chain mortgage assets, the legal ambiguities surrounding the enforceability of smart contracts, and regulatory concerns regarding the use of digital currencies for settlement purposes. Additional challenges arise from high issuance costs,the persistence of legacy IT systems,and the divergence of national legal frameworks.
Nevertheless, Moody’s suggests that jurisdictions possessing supportive legal structures and compatible bond programs may be better positioned to pioneer blockchain innovations in this space. Until these foundational elements are more widely established, the impact of blockchain technology on the covered bond market is likely to remain constrained.
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