This report, co-authored by Standard Chartered Bank and Synpulse, provides an in-depth look at the tokenization of real-world assets in the context of cross-border trade. It explains how tokenization can revolutionize global trade by turning trade assets into transferable instruments, offering investors unprecedented levels of liquidity, divisibility, and accessibility.

Unlike traditional financial assets, which can be highly volatile due to macroeconomic factors, trade assets are more stable. While trade is linked to economic performance and downturns can affect bank lending, there remains a significant gap in trade financing. This gap presents a valuable opportunity for investors, as small and medium-sized enterprises often still require substantial financing during economic slowdowns, leading to ongoing investment prospects. In many ways, trade assets can be resilient in the face of global economic challenges.

Additionally, because trade assets typically have shorter cycles, lower default rates, and higher financing needs, they are particularly well-suited for tokenization. Tokenizing these assets can also offer numerous benefits across the complex processes of global trade, including 1) facilitating payments for cross-border transactions, 2) addressing the financing needs of trade participants, and 3) utilizing smart contracts to improve efficiency, reduce complexity, and enhance transparency in trade operations.

Standard Chartered Bank forecasts that by 2034, the demand for tokenization of real-world assets will reach $30.1 trillion, with trade assets expected to rank among the top three tokenized assets, representing 16% of the total tokenized market within the next decade.

This report serves as a resource for market participants and investors. It explores the transformative potential of trade asset tokenization and explains why now is the right time to adopt and expand this practice. It also outlines four key benefits of tokenization and offers actionable steps for investors, banks, governments, and regulators to seize this opportunity and shape the future of finance.

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Tokenizing Real-World Assets: A Game Changer for Global Trade

Over the past year, we’ve seen rapid advancements in tokenization, signaling a major shift towards a financial system that is more accessible, efficient, and inclusive. Specifically, the tokenization of trade assets reflects a change in how we perceive value and ownership, as well as a fundamental shift in investment and exchange methods.

Standard Chartered Bank’s successful pilot project under the Project Guardian initiative, led by the Monetary Authority of Singapore, has demonstrated the feasibility of asset tokenization as an innovative framework that takes assets from issuance to distribution. This project showcases the potential opportunities for investors to engage in financing real-world economic activities.

In this initiative, Standard Chartered Bank took a pioneering step by creating a platform for the initial issuance of tokens representing real-world assets. They successfully simulated the issuance of $500 million worth of asset-backed securities (ABS) tokens backed by trade finance assets on the Ethereum public blockchain.

The success of this project highlights how open and interoperable networks can facilitate access to decentralized applications, spark innovation, and foster growth within the digital asset ecosystem. It also illustrates the practical applications of blockchain technology in finance, particularly in enhancing asset liquidity, lowering transaction costs, and improving market access and transparency.

Through tokenization, trade assets can be accessed and traded more efficiently by investors around the world. This process transforms trade assets into transferable instruments, unlocking levels of liquidity, divisibility, and accessibility that were previously hard to imagine. Not only does this provide investors with new opportunities to diversify their portfolios with digital tokens that have traceable intrinsic value, but it also helps address the global trade finance gap, which stands at $2.5 trillion.

1. What is asset tokenization?

In the midst of rapid digitalization in the financial world, digital assets are leading the way, fundamentally changing how we view and exchange assets. By combining traditional finance with innovative blockchain technology, we are entering a new era of digital finance that reshapes our understanding of value and ownership.

Before 2009, the idea of transferring value using digital assets seemed unimaginable. In the digital space, value exchange relied heavily on intermediaries who acted as gatekeepers, leading to inefficient processes. While there is some debate about the exact definition of digital assets in the financial industry, it’s clear that they are woven into the fabric of our technology-driven lives. From the rich digital files we use every day to the content we engage with on social media, digital assets are everywhere in our modern existence.

The advent of blockchain technology has changed everything. It is transforming financial markets and making what was once thought impossible a reality. Tokenization has emerged as a crucial factor in expanding the digital asset market, shifting it from a niche, experimental phase to one that is widely accepted and mainstream.

At its core, tokenization is the process of creating digital representations of real or traditional assets in the form of tokens on a distributed ledger. These tokens serve as digital certificates of ownership, improving operational efficiency and automation. Importantly, tokenization is closely linked to the idea of fragmentation, where a single asset can be divided into smaller, transferable units. The most groundbreaking aspect of tokenization is that it increases access to new asset classes and enhances the infrastructure of financial markets, paving the way for innovative applications and new business models in decentralized finance (DeFi).

2. The development of tokenization

Tokenization has its roots in the early 1990s. Real Estate Investment Trusts (REITs) and Exchange-Traded Funds (ETFs) were among the first to allow decentralized ownership of physical assets, enabling investors to own a share of tangible items like buildings or commodities.

The game changed in 2009 with the introduction of Bitcoin, a digital currency that challenged the traditional role of third-party intermediaries. This innovation sparked a revolution, which was further propelled by the launch of Ethereum in 2015. Ethereum is a groundbreaking software platform powered by blockchain technology that introduced smart contracts, allowing for the tokenization of virtually any asset. This laid the foundation for thousands of tokens representing various assets, including cryptocurrencies, utility tokens, security tokens, and even non-fungible tokens (NFTs), highlighting the versatility of tokenization in representing both digital and physical items.

In the following years, new trends emerged, such as Initial Exchange Offerings (IEOs) and Initial Coin Offerings (ICOs). In 2018, the U.S. Securities and Exchange Commission (SEC) introduced the term “Security Token Offering (STO),” which opened the door for regulated tokenized offerings and compliance-focused solutions.

These developments have paved the way for the tokenization of real-world assets to become a prominent focus. They continue to drive transformation and technological advancements in the financial services sector, creating opportunities for new applications. The financial services industry is actively exploring the potential of tokenization. With growing customer demand and the opportunities it presents for banks and the global digital economy, financial institutions are increasingly looking to integrate digital assets into their offerings.

A notable example of this effort is the Guardian project, a collaboration between the Monetary Authority of Singapore (MAS) and industry leaders aimed at testing how asset tokenization can work with decentralized finance (DeFi) applications. These pilot projects will shed light on the opportunities and risks associated with the rapid innovations in digital financial tokenization.

Standard Chartered Bank has presented an ambitious vision through the Project Guardian initiative, aiming to use blockchain networks to create a safer and more efficient financial system. This project is a collaboration between the Monetary Authority of Singapore (MAS) and industry leaders, where participating organizations conducted market case studies to design a blueprint for future market infrastructure that taps into the innovative potential of blockchain and decentralized finance (DeFi).

Taking this vision further, Standard Chartered Bank launched a token issuance platform for real-world assets. They successfully simulated the issuance of $500 million in asset-backed securities (ABS) tokens, which are backed by trade finance assets, on the Ethereum public blockchain. This initiative allowed Standard Chartered Bank to test the entire process from creation to distribution, including scenarios where defaults might occur.

• Tokenization: Trade finance receivables were represented as non-fungible tokens (NFTs).
• Risk-based Allocation: The NFTs were structured based on expected risks and returns, ensuring that cash flows were distributed correctly through senior and junior tranches.
• Fungible Token Creation: Based on the underlying NFTs and their structured design, two types of fungible tokens (FTs) were created. Senior FTs provide a fixed return, while junior FTs offer higher potential returns.
• Distribution and Access: Finally, these tokens were distributed to investors through an Initial Token Offering (ITO).

The successful pilot of Project Guardian showcased how open and interoperable blockchain networks can be used to facilitate access to decentralized applications, encourage innovation, and foster the growth of the digital asset ecosystem. The potential applications can extend to tokenizing financial assets like fixed income, foreign exchange, and asset management products, allowing for seamless cross-border trading, distribution, and settlement.

Additionally, by tokenizing the financing needs in cross-border trade scenarios, this new type of digital asset was introduced to a wider range of investors, helping to improve liquidity in the trade finance market.

3. What Else Can We See Beyond Trade Asset Tokenization?

Tokenization goes beyond just creating new digital asset investment opportunities and improving transparency and efficiency in trade finance; it can also play a more significant role in trade financing and simplify the complexities of supply chain finance.

Credit Transmission: Generally, trade financing is available only to established primary suppliers, leaving smaller suppliers—often small and medium-sized enterprises (SMEs) deeper in the supply chain—excluded from this financing. Tokenization allows SMEs to leverage the credit ratings of larger anchor buyers, enhancing the overall resilience and liquidity of the supply chain.

Creating Liquidity: Tokenization is often praised for its potential to unlock great opportunities, especially in markets that are inefficient and lack liquidity. There is a growing agreement that investors are more likely to adopt tokenized assets because of lower transaction costs and improved liquidity. For suppliers, the attraction lies in securing new capital, boosting liquidity, and improving operational efficiency.

Furthermore, Standard Chartered Bank believes that the transformative potential of tokenization is even greater. The next three years are expected to be pivotal for tokenization, with rapid tokenization of new asset classes, particularly trade finance assets, which will become central to this new landscape. The industry is evolving to a new level where collaborative efforts will yield greater benefits than isolated projects.

To facilitate access to these new asset classes, banks play a crucial role in providing trust and connecting existing traditional financial markets with new, more open token-supported market infrastructures. Maintaining trust is essential for verifying the identities of issuers and investors, conducting necessary checks, and enabling participation in this new interoperable financial ecosystem.

Standard Chartered envisions a future where traditional and tokenized markets coexist and eventually merge, highlighting the urgent need for an open and regulated digital asset infrastructure that supports multiple assets and currencies, complementing traditional markets. Unlike past closed-loop systems, this new infrastructure will allow ownership and utility to be shared among a wider range of market participants, balancing inclusivity and security. Such an infrastructure can enhance efficiency and innovation while addressing current challenges in the industry, such as duplicate investments and fragmented developments that hinder growth and collaboration.

4. What is Driving the Tokenization of Trade Assets?

Tokenization is transforming asset classes that were once seen as complex by providing unprecedented liquidity, divisibility, and accessibility. The current macroeconomic and banking landscape has acted as a catalyst for this adoption.

4.1 SMEs: Unlocking Trillions of Dollars in Opportunities to Address the Trade Finance Gap

Standard Chartered Bank forecasts that global trade will grow by 55% over the next decade, reaching $32.6 trillion by 2030. This growth is driven by factors such as digitization, the expansion of global trade, increased competition, and better inventory management. However, there is a significant gap between the demand for and supply of trade finance, especially for small and medium-sized enterprises (SMEs) in developing countries.

The trade finance gap has dramatically increased, rising from $1.7 trillion in 2020 to $2.5 trillion in 2023. This represents a 47% increase in demand—the largest single increase since this metric was first tracked. Factors like COVID-19, economic challenges, and political instability have made it harder for banks to approve trade financing.

Moreover, the International Finance Corporation (IFC) estimates that there are 65 million businesses in developing countries (40% of formal micro, small, and medium enterprises, or MSMEs) that still need financing. While the challenges facing SMEs and MSMEs are well-known, a critical segment often overlooked is the “missing middle.”

The “missing middle” refers to medium-sized enterprises that are difficult for investors to access. These businesses are situated between large investment-grade firms and small retail and micro businesses, and they are particularly active in rapidly developing regions like the Middle East, Asia, and Africa. They represent a large, untapped market, offering significant investment opportunities.

This investment potential can also withstand economic downturns. Since trade is closely linked to the economy, recessions will impact bank lending. However, the large trade finance gap presents a good opportunity for investors, as SMEs will still need substantial funding even during economic slowdowns, creating ongoing investment prospects.

Importantly, according to data from the Asian Development Bank, the $2.5 trillion global trade finance gap accounts for 10% of all trade exports. Currently, trade financing covers 80% of all exports, with an additional 10% potentially representing undisclosed trade finance gaps, as some businesses either do not seek financing or cannot access it. This indicates that the total undisclosed trade finance gap could represent a potential opportunity of up to $5 trillion.

4.2 Untapped Yield Markets for Investors

Trade finance assets are appealing but not sufficiently invested in. They provide strong risk-adjusted returns and have several unique features:

• Risk Diversification: Trade assets typically have short durations and can easily be converted to cash, making them low-risk investments that are less correlated with stock and bond markets. This characteristic allows them to be a more stable asset class while still delivering strong risk-adjusted returns.
• Variety of Investment Options: There is a wide range of trade assets available to cater to different investor risk preferences. Moreover, emerging and frontier markets like Ghana, Côte d’Ivoire, Bangladesh, and Saudi Arabia, which are often harder to access, offer additional investment opportunities within this asset class.
• Low Default Risk and High Recovery Rates: Importantly, trade finance assets have an excellent performance record. They generally have lower default rates compared to public credit, and when defaults do occur, the recovery rates are higher. This suggests that trade assets provide better risk-adjusted returns than other debt instruments.

However, institutional investors have been hesitant to invest in these assets due to a lack of understanding, inconsistent pricing, lack of transparency, and operational complexities. Tokenization has the potential to help overcome these challenges.

4.3 Banks Are Motivated to Embrace Tokenization and Use Blockchain-Based Digital Origination Models to Unlock Capital in Frontier Markets

Basel IV is a comprehensive set of regulations that will greatly change how banks calculate their risk-weighted assets. While full implementation is not expected until 2025, banks need to modernize their distribution models to develop growth strategies that comply with Basel IV.

By using blockchain-based origination distribution, banks can remove certain assets from their balance sheets, which helps reduce the regulatory capital they need to hold against risks. This also facilitates more efficient asset origination. By distributing trade finance instruments to capital markets and emerging digital asset markets, banks can take advantage of tokenization. This strategy, known as “digital origination distribution,” can improve banks’ return on equity, broaden their funding sources, and enhance net interest income.

The global trade finance market is enormous and well-suited for tokenization. Most trade finance assets held between banks can be tokenized and turned into digital tokens, allowing global investors seeking returns to get involved.

4.4 Real Demand Fuels Growth

A report by EY Parthenon indicates that demand for tokenized investments is expected to surge. By 2024, 69% of buying companies plan to invest in tokenized assets, a significant increase from just 10% in 2023. Additionally, investors aim to allocate 6% of their portfolios to tokenized assets by 2024, with that percentage rising to 9% by 2027. This trend indicates that tokenization is not just a passing fad; it signifies a fundamental change in investor preferences.

However, the supply side of the market is still developing. By early 2024, the total value of real-world asset tokenization (excluding stablecoins) is expected to be around $5 billion, mainly involving commodities, private credit, and U.S. Treasury bonds. In contrast, Synpulse predicts that the total market, including the trade finance gap, could reach $14 trillion.

Based on current market trends, Standard Chartered Bank anticipates that by 2034, the demand for real-world asset tokenization will hit $30.1 trillion. Trade finance assets are expected to be among the top three tokenized assets, accounting for 16% of the total tokenization market in the next decade. Given that demand may exceed supply in the coming years, this could help address the existing $2.5 trillion trade finance gap.

5. Four benefits of embracing tokenization

Asset tokenization has the potential to transform the financial landscape, providing increased liquidity, transparency, and accessibility. While it holds great promise for all market participants, realizing its full potential will require the combined efforts of all stakeholders.

Trade finance stimulates the global economy, but traditionally such assets have been sold mainly to banks. Tokenization opens the door to a wider investor base and ushered in a new era of growth and efficiency.

5.1 Improving market access

Currently, institutional investors are keen to explore new and rapidly growing markets. Emerging markets can be an attractive avenue for diversifying investments. However, many investors find it challenging to take full advantage of the opportunities in these markets due to a lack of local expertise and effective distribution networks.

This is where tokenization shines. By using digital tokens to distribute trade finance assets, banks can boost their net interest income and optimize their capital structure. At the same time, investors, businesses, and communities that rely on trade finance can benefit from greater accessibility.

An example of this transformative potential is the early collaboration between Standard Chartered Bank and the Monetary Authority of Singapore on Project Guardian. This pilot project illustrates how an open and interoperable digital asset network can improve market access and enable investors from various ecosystems to participate in the tokenized economy, paving the way for more inclusive growth.

5.2 Simplifying trade complexity

Trade finance is often seen as complex due to the involvement of multiple parties and the cross-border nature of global capital and goods trade. This asset class lacks standardization, with variations in ticket sizes, timing, and underlying commodities, making large-scale investments challenging.

Tokenization offers a solution to this complexity.

It’s not just a new way to attract investment; tokenization can also drive deeper financing. Traditionally, trade finance is available only to established first-tier suppliers, leaving “deep” suppliers often excluded. Token-supported deep supply chain financing can help eliminate these complexities.

Beyond providing much-needed transparency and efficiency, tokenization can enhance the resilience and liquidity of the supply chain by allowing small and medium-sized enterprises (SMEs) to rely on the credit ratings of major buyers.

Case B: Project Dynamo — Using Digital Trade Tokens to Simplify Trade

Project Dynamo is a collaboration involving Standard Chartered Bank, the Bank for International Settlements Hong Kong Innovation Hub, the Hong Kong Monetary Authority, and tech companies. This initiative exemplifies how digital trade tokens can address trade complexities.

The project led to the creation of a prototype platform where major buyers can use tokens to make programmable payments to their suppliers across the supply chain. Smart contracts automate the execution and redemption of these tokens based on specific events (like triggering electronic bills of lading or environmental, social, and governance conditions), making trade processes more efficient and transparent. Major buyers can also make conditional payments to their SME suppliers, converting tokens into cash only when certain conditions (like proof of delivery) are met.

Token holders have multiple ways to manage their tokens. They can keep them, sell them for financing, or use them as collateral for loans. This flexibility in ownership transfer through tokenization allows deep suppliers to manage their funds more efficiently.

The advantages extend beyond individual participants. Digital trade tokens are issued as “stablecoins,” backed by dedicated bank funds or guarantees. This, along with the programmability and transferability offered by blockchain technology, boosts institutional investors’ confidence in investing in SMEs and supply chain financing, which were previously considered high-risk.

Project Dynamo is just the start. It lays out a blueprint for overcoming the challenges suppliers (especially SMEs) face in accessing deep supplier financing by offering more flexible and efficient financing and payment methods. Ultimately, it opens up a new funding channel for those who previously lacked access to traditional financing options.

Case C: Using Programmable CBDCs to Optimize Trade Processes and Financing

While tokenization offers exciting possibilities for simplifying the complexities of trade, the programmability of central bank digital currencies (CBDCs) adds another transformative element. These digital forms of government-issued money can use smart contracts to automate transactions, making trade and supply chain financing even easier.

Imagine a scenario where a large company with a solid credit history (the major buyer) has a network of suppliers, many of whom are small and medium-sized enterprises (SMEs) struggling to get loans. With programmable CBDCs, the major buyer can instruct their bank to program future payments in CBDCs and send them directly to suppliers. The suppliers can then use these CBDCs to improve their working capital or pay their own suppliers further down the chain.

This simplified process provides several benefits for deep supply chain financing:

• Increased Flexibility: Deep suppliers can use digital currencies as collateral to borrow traditional currency, unlocking new financing options and enhancing their operational flexibility.
• Easier Credit Assessments: Banks can streamline the credit assessment process for SMEs by utilizing customer data collected through payments, reducing the costs and risks associated with data collection.
• Scalability and Transparency: CBDCs help SMEs scale their operations, making it easier for everyone in the supply chain to report on environmental, social, and governance (ESG) management and sustainability efforts.
• Stability and Confidence: Overall, CBDCs enhance the stability and transparency of the entire supply chain.

In this scenario, smart contracts are essential for automating payment and financing processes:

Pre-Defined Contracts: Smart contracts allow CBDCs to be programmed to combine payment and trade information, creating a new tool for trade financing.

Purpose-Bound Payments: Deep suppliers that don’t meet credit requirements can use tokens as collateral to secure financing tied to specific purposes.

Purpose-Bound Financing: Major buyers can transfer these CBDCs to their suppliers, who can use them immediately to pay deep suppliers.

Obligation Fulfillment: When the conditions set in the smart contract are met, the contract executes automatically, lifting any restrictions on the CBDC.

5.3 Digital Securitization

Traditional finance has successfully turned trade assets into financial products, but this process is limited to a small range of assets, like working capital loans and import/export financing. Tokenization, however, greatly expands the range of investable assets.

Trade assets typically have short durations, making the entire process inefficient. Additionally, tracking the underlying assets, assessing performance, and managing funding and payments require comprehensive management solutions.

These issues can be effectively addressed through tokenization and smart contracts, combined with AI automation to manage the complexity involved. By automating processes, data management becomes simpler and more efficient. Each token is traceable because it is linked to accounts receivable, which helps monitor status, reduce human error, enhance transparency for all parties, and support the evaluation of receivables and financing amounts.

The programmability of tokens also streamlines the transfer of ownership during transactions, improving overall efficiency.

Since tokenization standardizes the representation of accounts receivable, it creates a common language that simplifies the management of these assets across different jurisdictions.

5.4 Reducing information asymmetry

Using blockchain to track underlying assets helps reduce the information gap between issuers and investors, boosting investor confidence.

Creating a listing framework for tokenized assets is a vital step in promoting their adoption and enhancing investor trust. Publicly disclosing issuance documents makes it easier for investors to access the necessary information for thorough due diligence. Listed tokens can also ensure that issuers maintain transparency and comply with regulatory disclosure requirements, which is critical for many institutional investors.

Today’s investors are more sophisticated and expect higher transparency and control. We are likely to see tokenized products become a new way to address information asymmetry. Besides representing the underlying assets, tokens can also provide features like online access to operational and strategic data related to those assets. For instance, in the tokenization of working capital loans, investors could view operational metrics of the underlying business, such as profit margins or the number of potential customers in sales channels. This approach has the potential to improve investment returns and raise transparency to a new level.

6. How to participate in the tokenization market?

Asset tokenization has the potential to change the financial landscape by providing greater liquidity, transparency, and accessibility. While it offers hope to all market players, realizing its full potential requires everyone involved to work together.

6.1 Adoption

For institutional investors looking to explore new asset classes or improve returns, tokenization can offer more customized and distinct solutions tailored to their clients’ specific risk and liquidity preferences.

Family offices and high-net-worth individuals (HNWIs) can benefit from more effective wealth growth strategies through diversified and transparent products, unlocking opportunities that were previously out of reach.

To take advantage of this investment opportunity, investors should start with a solid foundation. Since this is a new and evolving area, it’s essential to understand the associated risks, so education should be the first step in building expertise.

For example, participating in pilot programs can help investors and asset managers test and gain confidence in investing in tokenized assets.

6.2 Cooperation

The industry is at a critical juncture in fully embracing asset tokenization. Collaboration across the market is vital to harness the benefits of tokenization. Overcoming distribution challenges and improving capital efficiency requires teamwork. Banks and financial institutions can enhance their reach through collaborative business models, such as developing industry-wide tokenized utilities. Likewise, intermediaries like insurance companies can serve as alternative distribution channels to expand market access.

Understanding the transformative impact of tokenization on capital and operational efficiency, the industry must come together to leverage shared infrastructure.

In addition to financial institutions, a broader ecosystem that includes technology providers and other stakeholders must collaborate to create a supportive environment. It’s essential to achieve interoperability, legal compliance, and efficient platform operations through standardized processes and protocols.

Currently, tokenization efforts are in their early and fragmented stages, highlighting the urgent need for the entire industry to work together to tackle these challenges. By combining the strengths of traditional finance (TradFi) with the innovation and agility of decentralized finance (DeFi), we can pave the way for a more stable, unified, and mature digital asset ecosystem that balances technological progress with regulatory consistency and market stability.

6.3 Promotion

In conclusion, both market participants and governments, along with regulatory agencies, play a crucial role in fostering responsible growth in the digital asset industry. By creating policies that encourage global trade and support local communities—such as job creation—they can help advance the industry while minimizing risks.

A clear and balanced regulatory framework is essential for promoting innovation and protecting against the challenges that arise in the cryptocurrency sector.

It’s also important to establish public-private partnerships with banks and other financial institutions. These collaborations can help speed up industry growth by encouraging responsible and sustainable practices.

Through these partnerships, regulators can ensure that the growth of the digital asset industry contributes positively to the economy, enhances global financial integration, creates jobs, and upholds market integrity and investor protection.

Report Link:

Real-world asset tokenisation: A game changer for global trade by Standard Chartered & Synpulse

https://www.hkdca.com/wp-content/uploads/2024/07/rwa-tokenization-game-changer-global-trade-synpulse.pdf

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