Mifiel, a Mexican legal tech company specializing in digital signatures for financial institutions, has announced its product for digitized promissory notes issued on the Liquid network to facilitate financing for Mexican financial institutions by global investment banks. These electronic promissory notes are used in collateralized financial transactions by non-bank financial companies in structured debt vehicles. Of the estimated 69,000 promissory notes created with a value of $212 million, the company has transferred or issued around $43 million directly on Liquid to date, expecting the remaining promissory notes to be transferred over the coming months, in addition to new notes already being issued directly.
Digitalization (often called tokenization) offers issuers access to global liquidity at a reasonable cost with less friction and greater control for investors over their financial assets, with the ability to transfer them peer-to-peer and self-custody.
As of the publication of this information, Mifiel has already issued over 2,000 promissory notes on Liquid, with an average value of $23,000 per note.
The Role of Promissory Notes
Physical promissory notes are considered high-value financial assets in emerging economies like Mexico's due to their high legal protection for debt collection by lenders compared to alternatives. Because of this legal benefit, most credit issued by non-bank financial institutions in Mexico (both B2B and B2C) is through promissory notes.
When a financial institution seeks financing from other lenders or capital markets, it’s common for them to use promissory notes signed by their debtors as collateral. The financial institution (FI) endorses the promissory note to a banking trust, and the lender transfers the funds to the FI. The promissory notes are used as collateral for the loans.
Current Complexity and the Challenge of Digitalization
A structured debt transaction involves multiple participants. In addition to the FI that collateralizes the promissory notes and the lender who loans money to the FI, there is also a bank that sets up the trust, a primary administrator, a backup administrator, and a custodian for the promissory notes. When the loan is executed through the capital markets, even more participants are required.
Moving and storing physical promissory notes is complex due to the large number involved; it’s common for thousands to be used in a single structured debt operation. Verifying them is also quite tedious, as when they are physical, they must be counted manually.
Digitizing promissory notes has historically been challenging because there was no foolproof way to ensure that only one copy of the digital promissory note was endorsed and not reused as collateral with multiple lenders.
One solution employed in several countries is to leverage a centralized depository and legally mandate that all promissory notes and their transfers be registered there. However, most jurisdictions have opted not to implement a centralized depository of this type for electronic promissory notes due to legal concerns and the systemic risk it creates.
Issuing promissory notes on Liquid eliminates intermediaries such as the custodians from financial institutions (highlighted in the blue box). With this solution, each promissory note no longer needs to be sent physically one by one from the financial institution and audited, creating significant savings for the parties involved.
Liquid as the Solution
Liquid solves the digitalization dilemma by verifying each promissory note and its ownership on the blockchain. Each note is cryptographically linked to a unique digital note or "token" on Liquid, allowing the borrower to endorse the promissory note to the lender while transferring the Liquid token to them. The token functions similarly to a CUSIP or an ISIN identifying a particular financial asset but with a much higher verification capacity, thereby creating a new use case for NFTs in the form of digital CUSIP notes. Even if the standard identifiers (i.e., borrower, principal, coupon, and maturity) are the same across promissory notes, each participant can verify and authenticate each note using the token.
As more promissory notes and other financial assets move to a digital standard, issuing on Liquid provides a secure way for local financial institutions to diversify and access international funding markets with greater flexibility, all in compliance with regulations.
“After initially developing the product on Litecoin’s ColoredCoins protocol, we decided to migrate to a more suitable solution. We evaluated most public blockchains and concluded that Liquid offered the best balance between security, decentralization, regulatory risks, and transaction costs.” - Tomás Álvarez Melis, Co-founder of Mifiel.
Overly expressive smart contract programming languages lead to security issues, hacks, and hundreds of millions of dollars in lost value each year. Liquid’s technical team is led by Blockstream, one of the leading Bitcoin infrastructure companies, with a focus on security. Liquid has a simple, low-level programming language based on Bitcoin Script and shares many of its developers with Bitcoin Core.
For complex digital assets that require higher programmability, there is the AMP (asset management platform) application, which allows financial institutions a high level of granularity to define the rules applicable to the transfer and ownership of tokens, thus creating high added value in digital asset lifecycle management.
Physical promissory notes are considered high-value financial assets in emerging economies like Mexico's due to their high legal protection for debt collection by lenders compared to alternatives. Because of this legal benefit, most credit issued by non-bank financial institutions in Mexico (both B2B and B2C) is through promissory notes.
A structured debt transaction involves multiple participants. In addition to the FI that collateralizes the promissory notes and the lender who loans money to the FI, there is also a bank that sets up the trust, a primary administrator, a backup administrator, and a custodian for the promissory notes. When the loan is executed through the capital markets, even more participants are required.
Liquid solves the digitalization dilemma by verifying each promissory note and its ownership on the blockchain. Each note is cryptographically linked to a unique digital note or "token" on Liquid, allowing the borrower to endorse the promissory note to the lender while transferring the Liquid token to them. The token functions similarly to a CUSIP or an ISIN identifying a particular financial asset but with a much higher verification capacity, thereby creating a new use case for NFTs in the form of digital CUSIP notes. Even if the standard identifiers (i.e., borrower, principal, coupon, and maturity) are the same across promissory notes, each participant can verify and authenticate each note using the token.