Using blockchain technology in credit rating industry to promote an innovative bond-pays model

Purpose: 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. Design/methodology/approach: 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. Findings: 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. Practical implications: 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. Originality/value: The proposal to adopt blockchain technologies in implementing a bond-pays model in credit rating industry is a novel contribution.