Tokenization: The Transformative Force in Global Trade

Standard Chartered Bank and Synpulse have jointly released a comprehensive report on the tokenization of real-world assets, detailing how tokenization is set to be a game changer in global trade. The report highlights that by transforming trade assets into transferable instruments, tokenization offers investors unprecedented liquidity, divisibility, and accessibility.

Trade assets have unique advantages that can withstand global economic downturns. Even during periods of economic slowdown, small and medium-sized enterprises still require significant financing, creating ongoing investment opportunities. Trade assets, due to their relatively short cycles, lower default rates, and high financing demand, are more suitable to be the underlying assets for tokenization.

The tokenization of trade assets can provide numerous benefits for various participants and processes in the complex global trade landscape, including the payment of cross-border trade funds, the financing needs between trade participants, and the use of smart contracts to enhance trade efficiency, reduce complexity, and ensure transparency.

Standard Chartered Bank expects that by 2034, the overall demand for tokenization of real-world assets will reach $30.1 trillion, with trade assets becoming one of the top three tokenized assets, accounting for 16% of the total tokenization market in the next decade.

1. The Development of Tokenization

Tokenization can be traced back to the early 1990s. Real Estate Investment Trusts (REITs) and Exchange-Traded Funds (ETFs) were among the first to achieve decentralized ownership of physical assets, allowing investors to own a portion of tangible assets such as buildings or commodities.

The birth of Bitcoin in 2009 challenged the concept of traditional third-party intermediaries. In 2015, Ethereum introduced smart contracts that support the tokenization of any asset. This was followed by new phenomena such as the Initial Exchange Offering (IEO) and Initial Coin Offering (ICO).

The financial services industry continues to actively explore the potential of tokenization. Driven by customer demand and the potential opportunities that tokenization brings to banks and the global digital economy, financial institutions are increasingly seeking to integrate digital assets into their services.

2. Factors Driving the Tokenization of Trade Assets

1. Seize the opportunity to fill the trade finance gap

The global trade finance gap increased from $1.7 trillion in 2020 to $2.5 trillion in 2023. The tokenization of trade assets helps to alleviate this gap, especially for small and medium-sized enterprises in developing countries.

2. The fertile market that has not yet been developed by investors

Trade finance assets are attractive, but underinvested. They generate strong risk-adjusted returns and have some unique characteristics:

• Allows for risk diversification
• Wide range of investments
• Low default risk and high recovery rate

3. Banks are incentivized to adopt tokenization

Basel III will have a significant impact on how banks calculate risk-weighted assets. Through blockchain-based origin distribution, banks can derecognize assets from their balance sheets, thereby reducing the regulatory capital required to cover risks and helping to facilitate efficient asset origination.

4. Real demand drives growth

By 2024, 69% of buyer companies plan to invest in tokenized assets, up from 10% in 2023. By 2024, investors plan to allocate 6% of their portfolios to tokenized assets, rising to 9% by 2027.

3. Four Benefits of Embracing Tokenization

1. Improve market access

Tokenization has opened the door to new emerging markets for a broader group of investors, ushering in a new era of growth and efficiency.

2. Simplify trade complexity

Tokenization is not just a new way to obtain investment, it is also a driver of deep financing. Token-supported deep supply chain financing can eliminate complexity and enhance the overall resilience and liquidity of the supply chain.

3. Digital Tokenization

Tokenization will greatly expand the investable asset pool. Through tokenization and the programmability of smart contracts, along with the complexity and diversity behind AI automation, data management and automation processes can be simplified.

4. Reduce information asymmetry

Using blockchain to trace the underlying assets helps to reduce information asymmetry between issuers and investors, thereby enhancing investor confidence.

4. How to Participate in the Tokenization Market?

1. Adopt

Investors should start with education to build expertise. Participating in pilot programs will enable investors and asset managers to experiment and build confidence in tokenization asset allocation.

2. Cooperation

Collaboration across the entire market is crucial for realizing the benefits of tokenization. Banks and financial institutions can expand their reach through collaborative business models, such as developing tokenized industry utilities.

3. Promote

Governments and regulatory bodies play a key role in promoting responsible growth in the digital asset industry. By formulating policies that encourage global trade and support communities, they can facilitate industry development while mitigating risks.

A clear and balanced regulatory framework can promote innovation while preventing the pitfalls that arise in the crypto space. Establishing public-private partnerships with banks and other financial institutions is also crucial.

Through this cooperation, regulators can ensure that the growth of the digital asset industry benefits the economy, improves global financial integration, creates job opportunities, and maintains market integrity and investor protection.