Absolute blockchain strength? Evidence from the ABS market in China

Summary

Focus

This paper considers the emerging asset-backed security (ABS) market in China and its rapid adoption of blockchain technology. We investigate whether blockchain adoption improves ABS trading. We also examine if the effect varies across different underlying asset classes or institutional arrangements. Finally, we ask if social factors, such as familiarity among key ABS market participants, may increase the benefit of adopting blockchain in ABS products.

Contribution

Blockchain's potential to improve business operations has been touted by many researchers and practitioners. However, the academic literature has provided little empirical evidence on how financial services may benefit from the new technology. This paper uses data on blockchain-based and traditional ABS deals in China to test if market participants perceive benefits from using blockchain in ABS deals. In doing so, it uses coarsened exact matching to control potential endogeneity and prior shared experience among key ABS parties to measure social embeddedness or interactions.

Findings

We find that adopting blockchain has improved the efficiency and transparency of ABS trading in China. In particular, the cost of ABS issuance has fallen by around 25 basis points. This benefit is larger for ABS based on less standardised and more opaque assets, such as consumer loans or accounts receivable, than for residential mortgage-backed securities. Finally, we find evidence that market participants appreciate the benefit of using blockchain for certain types of ABS deal when key players in the deals are familiar with each other.

Abstract

Blockchain, a type of distributed ledger technology, has become a buzzword in the past decade. Its potential to challenge current business practices such as financial transactions has been touted or criticised by numerous researchers and practitioners. Nonetheless, academic literature thus far has provided little empirical evidence on how financial services benefit from such new technology. We exploit the emerging asset-backed security (ABS) market in China and its rapid adoption of blockchain technology. We examine whether blockchain-based ABS products enjoy better pricing than those not based on blockchain after controlling potential endogeneity with coarsened exact matching. Analysing approximately 5,000 ABS products issued between 2015 and 2020, we show that the adoption of blockchain technology indeed reduces the yield spread by approximately 25 basis points and that this benefit is heterogeneous across the different underlying asset classes and institutional arrangements. Interestingly, we find that social factors such as familiarity among key ABS parties may increase or decrease the benefit of adopting blockchain in ABS products depending on the asset classes and regulatory environments. Our study makes a timely contribution to the debate surrounding blockchain technology and its implication for the financial sector.

JEL classification:  G30, G32, M40, O33

Keywords: asset-backed security, blockchain, financial technology, social embeddedness, technology adoption