By Frances Yue
Societe Generale /zigman2/quotes/206663756/delayed FR:GLE -5.03% (SocGen), one of the world’s largest investment banks, is raising a loan through a subsidiary from decentralized platform MakerDAO, to refinance some tokenized bonds it holds.
If materialized, it will be the first time a major bank borrows from decentralized finance, or DeFi protocols, which refer to programs powered by cryptocurrencies and blockchains without reliance on intermediaries.
As DeFi protocols replace human middlemen with self-executing computer programs, they claim to be more efficient, faster and cheaper. Supporters also point to DeFi’s potential to benefit unbanked communities, as no government ID or social security number is required to use the platforms.
However, DeFi has also drawn concerns from regulators and some investors, as they worry that a loophole in the code may lead to investors losing assets, while no one would take responsibility.
DeFi platforms are often seen as competitors of banks. However, SocGen’s most recent experiment may herald some integration between the two worlds. Advocates envision a future where DeFi plays a major role in the EUR 2.9 trillion European covered bonds market and even the near $11 trillion U.S. corporate bond market.
“I truly see banks and the financial industry as a whole, as probably the best and the largest clients, potentially, of those decentralized protocols,” Jean-Marc Stenger, chief executive officer at the subsidiary Societe Generale – Forge (SG Forge), told MarketWatch in an interview.
The Maker protocol is a decentralized application that allows users to mint DAI, an algorithm-powered stablecoin pegged 1:1 to the U.S. dollars, by depositing collateral assets. As one of the earliest DeFi protocols that received mass adoption, Maker has $15 billion value locked on it as of Monday, Oct. 18.
Unlike most companies with centralized leadership, Maker is governed by a decentralized autonomous organization, or DAO, where a group of holders of the governance token MKR make decisions.
The future of bond refinancing?
SG Forge is raising up to 20 million DAI, which equals $20 million, with a tenor of six to nine months from MakerDAO, according to a proposal the firm posted on the MakerDAO forum on Sept. 30. Proceeds from the loan will be used to refinance some OFH bond tokens due 2025 held by Societe Generale, according to the post.
In 2020, Societe Generale SFH, a subsidiary of SocGen, issued security tokens called OFH tokens on the Ethereum blockchain, representing EUR 40 million zero coupon covered bonds due 2025 backed by home loans. The bond was given top AAA ratings by Moody’s and Fitch.
Security tokens are when securities such as equities, debt or derivatives, are issued on blockchains.
Compared with traditional securities, issuing security tokens would enable access to broader liquidity pools, according to Stenger. “When you issue such securities on a public blockchain, it’s a worldwide infrastructure,” Stenger said. “You can access them from anywhere in the world. It’s like the internet.”
“This first experimentation of a refinancing structure of security tokens through a DeFi protocol will allow us to shape the future for bond refinancing business activity,” SG Forge wrote in the post on the MakerDAO forum.
SG Forge plans to offer such refinancing solutions for security tokens to its clients starting next year, according to Stenger. The firm has been structuring debt instruments, including covered bonds, secured and unsecured notes and structured products in the form of security tokens, with the first one launched in 2019.
In the test case with MakerDAO, SocGen used OFH tokens to ease the process, as the bonds were issued by a SocGen entity and all held by SocGen since then. Also they bear zero coupon interest so the deal could “avoid asset servicing complexity.”