Explained: The Tokenisation of Financing

The tokenisation of financing, or in plain language the provision of real-world loans using blockchains, is a shining example of the utility of blockchain technology. This financial revolution is slated to boost accessibility, efficiency and transparency throughout the financing ecosystem, but few understand the technology enabling this shift.

What is Tokenisation?

The term “tokenisation” is often associated with the replacement of sensitive digital information with a cryptographic token. However, when we discuss the tokenization of finance, we are referring to something quite different. In this context, tokenization means the digital representation of a real-world asset — such as a trade financing agreement or a real estate deed —on the blockchain. A smart contract is then created, linking legal rights to the token and establishing a crucial connection between the asset, the token, and the owner.

Once assets are represented on a blockchain, ownership of these real-world assets can be traded or used as collateral, typically through decentralised finance (DeFi) platforms. To interact with a tokenized asset, all one needs is a wallet address and an internet connection. Transactions or changes are usually executed quickly and at a low cost.

Why Tokenisation is Changing the Face of Financing

One of the key advantages of tokenisation is the digitization of the traditionally manual and labour-intensive process of financing. By moving this process on-chain, all stakeholders—lenders, investors, creditors, debtors, and others—gain equal access to information whenever changes are made to the asset, enhancing transparency in the financing process. This digitisation also significantly reduces the time between the need for financing and the provision of funds, potentially allowing businesses to request and receive funding within 24 hours.

Tokenisation also helps to tackle discrimination in finance, which remains prevalent. According to UN estimates, the world is facing an annual financing gap of $4 trillion to achieve sustainable development, demonstrating the urgent need for reformed approaches to lending across the globe.  Tokenising financing has the power to close this gap by cutting out  intermediaries and enhancing broader access to capital by creating direct links to investors via decentralized platforms, making financing more cost-effective for SMEs and encouraging them to take on debt to fuel their growth. Tokenisation can also make the borrowing process more reliable, with clear guidelines for approvals and transparent, rules-based risk and compliance processes.

Accessibility for investors is also greatly improved. Financial systems are traditionally closed-loop ecosystems, with opportunities for investments in financing typically reserved for large-ticket investors including high net-worth individuals, investment funds and banks. By leveraging on-chain financing platforms like Credible or Plume Network, all investors with large or small tickets can contribute to the financing of real-world assets and gain access to a new source of returns.

Disrupting Traditional Financing Industries 

Tokenised finance, with increased accessibility for both creditors and debtors and the accompanying benefits from blockchain-based digitisation, is disrupting traditional lending practices. Standard Chartered recently predicted that tokenised assets will reach $30.1 trillion by 2034, as investors aim to allocate 9% of their portfolios to tokenised assets by 2027. 

In upcoming Finextra blogs, I’ll explore the industries most impacted by the tokenisation of financing, but here’s a quick teaser:

1. Stablecoins and cross-border payments: Across emerging markets, payment companies face significant challenges in establishing cross-border payment services, where maintaining pre-funded accounts in multiple countries often poses an obstacle due to limited capital, stifling innovation and creating a liquidity gap. Adopting stablecoins enables liquidity providers to use tokenised financing to quickly pre-fund accounts across a large number of jurisdictions without high fees, supporting payments innovation in the regions where it is most needed.
2. Cross-border payments: what are liquidity pools? Revolutionising the way DeFi stakeholders provide and access financing, liquidity pools are a collection of funds deposited into a smart contract. There are a lot of benefits to this approach, including greatly improved accessibility for a wide range of investor profiles, diversified yield generation and heightened transparency of the flow of funds.