Proponents of blockchain’s underlying technical capabilities are determined to shake off its cryptocurrency-centric associations.
In large part by finding historical opportunity areas within the traditional financial sector that digital assets were originally designed to replace.
After all, the technology’s innovative capability for storing and moving tokenized value within a digitally native landscape is worth interrogating for whatever utility it can offer as global channels of commerce increasingly move online.
One particular use case, the use of blockchain-based tokenization across trade finance and infrastructure investment, has caught the attention of the World Bank.
In a report, the organization notes that using blockchain to modernize trade finance has the “advantages of … efficiency gains driven by automation and disintermediation, transparency, and greater liquidity and tradability of illiquid assets.”
Particularly for infrastructure projects in countries where processes may suffer from more than one single point of failure, the World Bank report says that using blockchain-based financing can, among other benefits, improve contractual and financial standardization, bridge data asymmetries between parties and improve financial engineering, risk allocation and mitigation.
Of course, and as the World Bank notes, the lack of regulation designed for tokenized financial and investment products is one of the main barriers of using blockchain tools for to support financing.
Still, the lack of readily available financing and working capital solutions for organizations around the world is a problem that is looking, and ready, for a solution.
It remains up to individual firms, enterprises, and financial networks to determine whether deploying blockchain’s intrinsic distributed ledger technology (DLT) as a replacement or additive element to traditional financial and payment vehicles provides enough benefits to justify the use of the technology.
That decision will need to be made across a risk-adjusted confidence band of use-cases.
Read more: Tokenization Must Prove Useful in Order to Scale
New (Feb. 28) PYMNTS Intelligence finds that users of working capital — strategically and tactically — outperformed those firms that did not use working capital. The research found that there is a strategic deficit for foreign firms.
And that could be an opportunity area for tokenization. In one recent example of how DLT can add further dimensions to the financing landscape, Swiss crypto custody firm Taurus, which is backed by Deutsche Bank, launched a partnership with lending platform Teylor. Teylor offers loans between $109,000 and $1.6 million to Germany’s “Mittelstand” sector — businesses with fewer than 500 employees and turnover of under 50 million euros.
As part of those joint efforts — and the growing appeal for tokenized debt — Teylor’s credit portfolio tokens are now allowed to be admitted for secondary market trading on the Taurus TDX market.
Separately, Citigroup earlier this month (Feb. 14) partnered with Wellington Management and WisdomTree to explore the tokenization of private markets. Smart contracts were used to encode the underlying fund distribution rules and embed them in the token transferred to hypothetical WisdomTree clients. This highlighted how smart contracts could enable greater automation and create an enhanced compliance and control environment for issuers, distributors and investors.
In September, Citi Treasury and Trade Solutions unveiled a digital asset solution designed to enhance cash management and trade finance capabilities. This solution uses blockchain and smart contracts to provide institutional clients with “always-on” and programmable financial services.
“The true intrinsic value of blockchain, which is around programmability of transactions, immutability of transactions, and the ability to do delivery versus payment and always-on types of payments, has yet to be unlocked,” Mastercard Chief Digital Officer Jorn Lambert told PYMNTS in July.
And as Pat Thelen, vice president of global account management at Ripple, said to PYMNTS on Oct. 6, “innovation is relentless. And innovation and competition will find a way to apply the technology that is already here. The technology is ready now. You have commercial banks, central banks and institutional players leaning in.”
Read more: Financial Blockchain Technology Gains Ground While Crypto’s Future Remains Uncertain
The blockchain story, it bears repeating, isn’t a new one — and at least for now, limited real-world and above-board utility has appeared.
But there are several ways in which blockchain can bring about significant changes in cross-border trade and project financing, many of which are due to existing inefficiencies across legacy processes.
For example, the ownership of most private assets today is commonly tracked on spreadsheets and centralized databases. When it comes to something like a trade finance document with many counterparties, the parties themselves are usually entrusted with the responsibility to submit paperwork around contract terms. Manual effort is almost always required to verify, consolidate and if need be rectify these documents, which is both cost- and time-intensive.
In contrast, blockchain enables the use of smart contracts, self-executing contracts with the terms of the agreement directly written into code. This can automate various aspects of trade financing, such as payment settlements, reducing the need for intermediaries and minimizing the risk of fraud. Blockchain also digitizes and securely stores documents such as invoices, bills of lading and letters of credit on a distributed ledger. This reduces the chances of errors, delays, and fraud associated with paper-based documentation.
As found in “Corporate Changes in Payment Practices: A Deep Dive Into the Real Estate Industry,” a PYMNTS Intelligence study in collaboration with The Clearing House, international transactions through conventional techniques in the real estate sector can be difficult, expensive and require additional documentation. However, with cryptocurrency, transactions can be executed swiftly and efficiently, regardless of the location of the parties involved. This simplifies the process for international investors.
Still, the bottleneck around scalable adoption of tokenized digital assets continues to be centered around whether the use cases of tokenized assets can perform better than the options that already exist today — and whether that performance warrants a rug-pull investment into an all-new and unproven infrastructure.
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