FIC Network: Fixed Income Securities Infrastructure for Cryptocurrencies

April 2018
By CeAnn Simpson
Posted: Updated:
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FIC Network is an end-to-end decentralized fixed income securities market network that enables the listing, exchange, and securitization of financial instruments. It is an asset-agnostic, multi-currency distributed ledger primarily focused towards institutional investors using traditional fiat currencies and emerging cryptocurrency markets.  FIC network is based on existing business and has been in development since 2016.  It will allow users to list, buy and sell any type of fixed income securities/financial instruments, including loans, bonds, collateralized loan obligations (CLOs), asset-backed securities (ABS), syndicated loans, credit default swaps (CDS), and futures.  Their whitepaper details use cases for each of the above financial instruments and how these are constructed and transacted via the network.

The Opportunity

Conventional fixed income securitisation has many inherent drawbacks including illiquidity, lack of interoperability, asymmetry of information and operational risk associated with these financial instruments.  Lack of transparency about what types of financial instruments were bundled into these securities and sold onto large institutions is what led to the 2008 Financial Crisis as depicted in The Big Short.

A fixed-income security is typically a loan made by an investor to a borrower, often the borrower here is a corporate entity or government (Corporate or Government Bonds). The borrower, or issuer, promises to pay a set amount of interest, called the coupon, on a predetermined basis until a set date. The issuer returns the principal amount, also called the face or par value, to the investor on or before the maturity date. The typical role of fixed-income securities in a portfolio is to generate regular income, reduce overall risk, and protect against volatility. The securities may appreciate in value and offer more stability for the principal than other investments.

There are two types of markets for fixed-income securities: Primary and Secondary.  The Primary Market occurs when the proceeds from the sale of listed securities go directly to the issuer via central exchange market.  The Secondary Market is the market where previously issued securities are traded; the proceeds from transactions on the secondary market go to the seller of the security, not the issuer.  Currently, there is no fixed-income securities or a primary market for cryptocurrencies.  These can only be traded OTC as there is no central exchange platform where cryptocurrency securities can be traded.  As a result, there is no way to generate regular income for investors using cryptocurrency securities or protect against price volatility.  As the cryptocurrency markets mature, earning interest on and borrowing against crypto-assets will become the largest financial market in this space.

The Solution

FIC network intends to create the structure for a cryptocurrency fixed income market to develop and reduce transaction costs by removing intermediaries and complex cost structures.  FIC network will also have integrated exchange functionality to allow for seamless trading of financial instruments between different currencies whether they be fiat or crypto-currencies.

Their goal is to address the shortcomings of the fiat-currency fixed income markets by using blockchain to remove intermediaries and create transparency.  The FIC Network will have the following benefits:

  • Removal of intermediaries: The P2P nature of the blockchain allows participants to interact directly with one another without intermediaries. The distributed ledger is updated in real-time by node holders, and any data inputted on the blockchain is transmitted and stored automatically.
  • Decentralization of consensus: No central authority acts as a clearinghouse for transaction validation. The effort to reach consensus is shared between miners.
  • Transparency (Pseudo-Anonymity): Public blockchains offer full transparency of transactions carried out while safeguarding the privacy of users since only the transacting addresses are recorded on-chain.
  • Speed & Security: Speed of transaction settlement will be reduced from days to seconds. With encryption through cryptography, no one other than the sender and recipient can access the data sent across the blockchain.

Launching a separate FIC Network blockchain is a necessary step to address fixed income market needs, adapt it to cryptocurrency market, distribute tokens effectively, and avoid scaling issues given the size of the fiat fixed income market.  Currently, FIC Network consists of three components:

  • FIC Network: The secure distributed ledger for fixed income markets is based on the Stellar protocol. It acts as a single, permanent source of consistent information about registered assets without a need for intermediaries or third-party providers.
  • eDepository: The software solution that communicates with the underlying infrastructure, the FIC Network. It allows network participants to publish, update, manage, and verify asset information throughout each loan’s life cycle as well as exchange information off-chain.
  • Infrastructure services: Asset exchange, analytics, audit, and insurance.

Network services are paid for using FIC, their utility token which will act as a payment token on their network and will be like Ripple’s XRP or Stellar’s XLM.

Opinion

Factury, Inc. is the parent company behind FIC Network.  I think this is a hugely ambitious project that is highly technical in nature and very well thought out. The use cases illuminate how transactions will be structured, created and transacted and what happens on-chain (creation of financial instruments, data/document upload, FIC network deposit, etc.) and what happens off-chain (prospectus, audit report, legal and regulatory filing, rating agency assessment etc.).

My only question is why does this project need a specific token for their network?  Why not use XRP by Ripple as a payment token or XLM by Stellar as the fuel for your stellar based protocol instead?  With their built-in exchange mechanism surely you can transact seamlessly between tokens, so why do you need a separate FIC Token to fuel your network?

I understand the project needs to raise funds to build their own blockchain.  However, isn’t their token a security because users are unable to transact using their FIC token until the network is built?  Given current US regulatory scrutiny, I would get in the sandbox and offer their FIC token as a security. This way you could also incentivise institutions for their participation and support to build it as they will eventually become your clients.

Finally, I think this is a very US-centric project.  In London earlier this year, a start-up blockchain company, Nivaura created and issued a bond to demonstrate how blockchain technology can be used effectively for bond issuance within the current legal and regulatory framework in Europe.  The competition is already out there and a few steps ahead of FIC Network.

By CeAnn Simpson

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