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Securitization & Tokenization: Concepts, Process, and Comparison

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Securitization & Tokenization: Concepts, Process, and Comparison

1. What is Securitization?

Securitization is the process of converting illiquid assets (like loans) into tradeable securities. It allows financial institutions to raise funds and transfer risks.

Features:

  • Pooling of assets
  • Tranching (senior/junior)
  • Structured repayments

Uses:

  • Liquidity enhancement
  • Risk transfer
  • Capital relief for banks

Risks:

  • Credit risk of underlying borrowers
  • Model risk in structuring
  • Systemic risk if improperly regulated

2. How is Securitization Executed?

  • Originator (e.g. bank) pools loans/assets
  • Assets are transferred to an SPV (Special Purpose Vehicle)
  • SPV issues securities to investors backed by cash flows from the assets

3. Participants and Instruments Involved

  • Originator: Entity that owns original assets
  • SPV: Legal entity that issues securities
  • Investors: Buyers of securities
  • Credit Rating Agencies
  • Credit Enhancers (e.g. insurers)
  • Obligors: Borrowers who are responsible for paying the underlying loans

4. ABS vs MBS

  • ABS (Asset-Backed Securities): Backed by receivables like credit cards, auto loans
  • MBS (Mortgage-Backed Securities): Backed by residential/commercial mortgage loans

5. Pass-Through vs Pay-Through vs Stripped Securities

  • Pass-Through: Cash flows directly passed to investors
  • Pay-Through: SPV modifies cash flow timing
  • Stripped Securities: Separated into interest-only and principal-only strips

6. Problems in Securitization

  • Complex structures lead to lack of transparency
  • Rating arbitrage
  • 2008 financial crisis was partly due to poorly structured MBS

7. Pricing in Securitization

Originator’s Perspective:

  • Focuses on funding cost vs asset yield
  • Uses net present value of future cash flows

Investor’s Perspective:

  • Focus on risk-return tradeoff
  • Considers credit rating, duration, cash flow certainty

8. What is Tokenization?

Tokenization is the process of converting rights to an asset into a digital token on a blockchain.

How it works:

  • Asset is identified (real estate, gold, bonds, art)
  • A token is created representing fractional ownership
  • Token is traded on a blockchain platform

Blockchain Benefits:

  • Transparency
  • Security
  • Real-time settlement

9. Tokenization vs Securitization

AspectSecuritizationTokenization
TechnologyTraditional FinanceBlockchain-based
LiquidityModerateHigh
TransparencyLimitedHigh
SpeedSlow (paper-driven)Instant (digital)
AccessibilityInstitutionalRetail-friendly

10. Other Important Points

  • Securitization boosts financial inclusion and liquidity
  • Tokenization opens doors to fractional investing globally
  • Both tools are evolving with regulation and tech convergence

Conclusion

Both securitization and tokenization transform how assets are structured and traded. One is traditional, the other futuristic—but both offer massive potential for investors, institutions, and financial markets alike.

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