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Sponsored by Standard Chartered
Why is tokenisation of trade finance transformative for investors?
Standard Chartered and Synpulse paper explains why digital assets are critical to addressing financing requirements of companies
Sponsored Section 8 Jul 2024

With institutional investors hungry for new, fast-growing markets, the opportunity of trade finance tokenisation is an exciting prospect that allows for exposure to emerging market assets. For banks, which traditionally are sold trade finance assets, tokenisation can help raise their net interest income and optimise their capital structure.

Given the projected 55% growth in global trade to US$32.6 trillion by 2030 according to Standard Chartered's Future of Trade report1, there is a critical need to secure additional sources of capital to support future financing demand.

This important development is something progressive institutions like Standard Chartered are looking to tackle, as detailed in the bank’s new paper titled “Real-World Asset Tokenisation: A Game Changer for Global Trade” written in collaboration with global consulting company Synpulse. In this in-depth paper, the bank explores the potential around tokenisation and why it is mutually beneficial for institutional investors, banks and companies in solving trade financing requirements now. Below are some key takeaways from the paper.

In its simplest form, tokenisation refers to the process of issuing digital representations of real or traditional assets in the form of a token on a distributed ledger which can be fractionalised into smaller and transferable units. This ability to produce bite-sized assets for ownership is a game changer for asset classes that are struggling to secure funding and liquidity.

Tokenisation could support companies in need of trade financing by opening a viable channel for institutional investors such as asset management companies and sovereign wealth funds to provide capital. MMEs are especially active in fast-developing regions such as the Middle East, Asia, and Africa. They represent a vast and largely unaddressed market, offering an immense yet unrecognised opportunity for investors.

Banks stand to gain from increased tokenisation of trade finance assets as well. With the increased pressure to comply with Basel IV requirements by 2025 on the calculation of risk-weighted assets, banks need to be strategic with their balance sheets.

Through tokenisation, banks can adopt an originate-to-distribute model for trade finance by distributing trade finance instruments they have initially financed to the capital markets and the emerging digital asset markets, thereby providing companies in need of trade financing, access to a global pool of institutional investors seeking returns.

Given the economic pressures facing companies to secure financing, coupled with the restriction of balance sheets from banks, the time is right now to start the conversation on how to scale up trade finance asset tokenisation.

Huge untapped market

Currently, the problem is the lack of tokenised asset supply unable to meet expected increasing demand. The total value of tokenised real-world assets excluding stablecoins is around US$5 billion for 2024, primarily across commodities, private credit, and US treasuries, according to estimates by the paper. On the other hand, the total addressable market size for tokenised trade finance, including the trade finance gaps, amounts to around US$14 trillion.

Expected market size for overall tokenised real-world assets could reach up to US$30.1 trillion by 2034 with trade finance asset tokenisation making up to 16% of the total market then.

Last year, Standard Chartered simulated the placement of US$500 million trade finance asset-backed security tokens on a public blockchain. Through this initiative, Standard Chartered tested an end-to-end process from structuring to distribution, including a simulated default scenario. The trade finance assets of the bank were tokenised in the form of non-fungible tokens (NFTs), allocated into senior and junior tranches, and distributed to interested investors through an initial token offering platform.

For both banks and institutional investors, the tokenisation of trade finance assets represents a win-win solution. Investors are drawn to adopting tokenised assets to reduce transaction costs and enhance liquidity. For institutions on the supply side, the appeal lies in being able to access new capital, boost liquidity, and streamline operational efficiency.

All banks, not only Standard Chartered, have a critical role to play in providing traditional financial markets with new, more open token-enabled market infrastructure. Trusted entities, banks can validate digital asset issuer and investor identity and run KYC/AML (know your customer and anti-money laundering) checks to determine who should participate in this new interoperable financial ecosystem.

The tailwind comes from multiple stakeholders who will make tokenised assets a reality. In the Asian financial hubs of Hong Kong and Singapore, market participants are working together with financial regulators to study and set standards for such future processes. In Hong Kong, Project Dynamo, a collaboration between Standard Chartered, BIS Innovation Hub Hong Kong, the Hong Kong Monetary Authority, and technology companies, explores how digital trade tokens can improve the whole supply chain finance process.

Similarly, Singapore has Project Guardian, an industry-wide collaboration between the Monetary Authority of Singapore (MAS) and industry leaders to test the feasibility of asset tokenisation and decentralised finance (DeFi) applications.

The key for governments and financial regulators going forward is to play a proactive role in promoting the responsible growth of the digital asset industry. Clear and balanced regulatory frameworks foster innovation while guarding against the pitfalls observed in the crypto space.

Industry collaboration a must

With several financial regulators already onboard, other market participants need to get actively involved now, with Standard Chartered in the paper calling them to join this tokenisation journey.

Institutional investors must have a strong educational foundation of what tokenised assets are and build internal capabilities to eventually invest in such assets.

Tokenisation can offer specific and differentiated solutions that are aligned with clients’ specific risk-return profiles and liquidity preferences. Family offices and high-net-worth individuals (HNWIs) can benefit from a more efficient wealth-growing approach through asset fractionalisation and transparent product structures that will unlock opportunities previously inaccessible to them.

Banks and other stakeholders must enhance collaboration through the integration of different business models such as the development of an industry-wide utility of tokenisation. The broader ecosystem, including technology providers and other players, must collaborate to create a supportive environment. Leveraging standardised processes and protocols for interoperability, legal compliance, and efficient platform operation is crucial.

The industry is currently in a nascent and fragmented state, which is why market-wide cooperation is essential now to solve issues around the widening trade finance gap.

Trade finance tokenisation makes sense now as an impactful way to bridge the global trade finance gap by making it easier and appealing for institutional investors to get involved, thereby opening access for MMEs and SMEs to a new world of capital.

Trade finance, which is often viewed as too complex to invest in in scale due to its multi-party and cross-border nature, can be simplified through tokenisation, which packages assets in unstandardised ticket sizes into a single investable instrument.

Finally, unlike securitised trade finance products and other asset-backed securities, tokenisation is investor-friendly. Coupled with the blockchain provenance, the publicly disclosed offering documents also makes it easier to provide interested investors with the information they need for due diligence.

With a significant amount of upside all-around, the time is ripe for the market to come together, from institutional investors to banks and work with Standard Chartered to make the tokenisation of trade finance assets an industry standard globally to tackle the pressing trade finance gap.

1 https://av.sc.com/corp-en/nr/content/docs/SC_Future-of-trade_2023.pdf

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