Morningstar Announces Ethereum-Based Credit Rating System

Investment product rating agency, Morningstar, has announced that their plans to expand into blockchain credit rating services on the Ethereum blockchain. The company will utilize a proprietary price oracle to export data from third-party sources onto Ethereum. According to Forbes, the company has a number of clients who are participating in various debt- denominated markets on Ethereum, October 1, 2019.

Start of Something Big

Morningstar is known for being the most comprehensive ratings provider for mutual funds and ETFs, but not many know that they recently forayed into credit ratings for corporate issuances. Since launch, this division has mustered a significant amount of traction, raking in nearly $1 billion in revenue from credit ratings alone.

Using a price oracle, the company will be able to bring real-world information onto the blockchain, but this oracle will by no means be decentralized – at least in the early stages.

This venture came into fruition when Morningstar was approached by Figure, a San Francisco based business, to help them issue home equity loans on a blockchain. Since then, the company has expanded to nine clients, the likes of which include asset and debt issuance companies to loan securitization firms. Most of these companies are dealing with Ethereum-centric money markets, so the logical move for them was to build their rating platform on Ethereum.

While competitors like S&P and Fitch have publicly lauded the positive benefits of blockchain-based money markets, none of them have taken the bold move of actually venturing into the space. Morningstar has already mapped a business plan backed thorough research and a coherent rationale.

Credit Rating Flaws Can be Eradicated

In traditional finance, credit ratings hold no real utility to investors. This is because of the revenue model of credit rating agencies, where they are paid by the companies issuing the debt to rate their ability to repay. The obvious conflict of interest has massively deteriorated trust in credit rating agencies.

This is Morningstar’s chance to revamp the model. If the revenue model changes so that investors pay for a credit rating report of a particular firm, the obligation to the debt issuer on behalf of the credit rating agency disappears into thin air.

Additionally, if data is transparent and can be sourced without cooperation from the issuer, there is no reason for the credit rating agency to have to bend the knee to debt issuers.