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This paper aims to propose an innovative blockchain-based system enabling implementation of a bond-pays model in credit rating industry. Issuer-pays model has led to…
This paper aims to propose an innovative blockchain-based system enabling implementation of a bond-pays model in credit rating industry. Issuer-pays model has led to conflict of interest resulting in rating shopping and inflation. Alternative business models have their own problems, e.g. investor-pays model suffers from “free rider” and public dissemination challenges, whereas government-controlled business models can lead to market distortion. Bond-pays model has been difficult to implement owing to operational difficulties in managing co-ordination amongst multiple entities involved, often with conflicting goals. Blockchain technology enables inter-organizational systems that foster trust amongst non-trusting entities, facilitating business functions such as credit rating to be carried out.
This paper outlines current processes in credit rating business that has led to repeated rating failures and proposes a new set of processes, leveraging capabilities of blockchain technology to enable implementation of an arms-length bond-pays model.
A proof-of-concept system, namely, rating chain has been designed to implement a small part of the proposed model to establish technical feasibility in a blockchain environment.
A fully functional blockchain-based system on bond-pays business model, if built and adopted, could impact how credit rating market functions currently and could contribute to a reduction in rating-related challenges.
The proposal to adopt blockchain technologies in implementing a bond-pays model in credit rating industry is a novel contribution.