Tokenized home loans used as collateral for a $7 million DAI loan by Société Générale

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(Kitco News) – In one of the best examples to date of the promise that decentralized finance (DeFi) holds in helping to transform the global financial system, French multinational investment bank and financial services company Société Générale has minted a loan of $7 million in the form of the stablecoin DAI on the MakerDAO platform.

Last August, members of the MakerDAO community unanimously voted to add the bank’s digital asset-focused subsidiary, Societe Generale–Forge (SG-Forge), to its vault and gave the firm a credit limit of $30 million in DAI.

As collateral for loans taken out by SG-Forge, Société Générale pledged 40 million euro worth of home loan bonds in the form of ‘OFH tokens’, which are tokenized securities issued on the Ethereum blockchain that are backed by home loans with AAA ratings from Moody’s that were issued by a Société Générale-affiliated credit institution.

This move is a clear example of how traditional financial firms will be able to leverage DeFi in the future as a potent new source of borrowing in a simple and efficient way.

The $7 million DAI loan is the first time that the bank has withdrawn funds from MakerDAO. SG-Forge has an additional $23 million in funds that it can borrow, which means that the debt position is overcollateralized with a 10 million euro buffer.

Société Générale first initiated the process that made this loan possible back in October 2021 when it proposed the addition of tokenized, AAA-rated euro-denominated bonds into the MakerDAO system.

“This first experiment at the crossroads between regulated and open source initiatives…is intended to refinance a Covered Bond Token that has been issued last year on the Ethereum public blockchain,” wrote Société Générale-Forge in their proposal to MakerDAO.

The experimental initiative largely aligned with MakerDAOs goal of increasing the collateral base of its DAI stablecoin and diversifying its balance sheet and treasury holdings into real-world assets (RWAs), so it was ultimately approved by the community. The platform sought to move away from its reliance on using Ether (ETH) and other centralized stablecoins as collateral, which was a growing source of risk.

The OFH tokens are based on the open-source framework CAST (Compliant Architecture for Security Tokens), which has previously been employed by Banque de France and the European Investment Bank both on the Ethereum and Tezos blockchains.

The overall goal of SG-Forge was to enable the conversion of DAI into US dollars, which could then be loaned to parent bank Société Générale in exchange for the OFH tokens in what is essentially a refinancing operation.

While the addition of real-world assets to its balance sheet is a welcomed development for MakerDAO, it also exposes the platform to the same regulatory and legal risks that traditional financial products are subjected to.

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