Asset Tokenization: The Game Changer for Global Trade

In recent years, the rapid development of asset tokenization reflects a shift in the financial system towards greater accessibility, efficiency, and inclusiveness. In particular, the tokenization of trade assets not only represents a change in our perception of value and ownership but also signifies a fundamental transformation in investment and exchange mechanisms.

A certain bank successfully piloted a project led by the Monetary Authority of Singapore, demonstrating the feasibility of asset tokenization as an innovative "from initiation to distribution" structure, as well as the potential opportunities it presents for investors to participate in financing real-world economic activities. The bank further advanced this vision by creating the first initial token issuance platform for real-world assets. They successfully simulated the issuance of a $500 million asset-backed security token, supported by trade finance assets, on the public blockchain Ethereum.

The success of this project demonstrates how open and interoperable networks can be used in practice to facilitate access to decentralized applications, inspire innovation, and promote growth within the digital asset ecosystem. This pilot project proves the practical application potential of blockchain technology in the financial sector, especially in improving asset liquidity, reducing transaction costs, and enhancing market access and transparency. Through tokenization, trade assets can be accessed and traded more effectively by global investors, transforming trade assets into transferable tools, which also unlocks previously unimaginable levels of liquidity, divisibility, and accessibility. It not only provides new opportunities for investors by balancing portfolios with digital tokens that have traceable intrinsic value but can also help close the global $2.5 trillion trade finance gap.

Development of Asset Tokenization

Asset tokenization can be traced back to the early 1990s. Real Estate Investment Trusts and Exchange-Traded Funds were among the first forms of decentralized ownership of physical assets, allowing investors to own a portion of physical assets such as buildings or commodities.

In 2009, the birth of Bitcoin challenged the concept of traditional third-party intermediaries. Subsequently, Ethereum introduced smart contracts in 2015 that support the tokenization of any asset. This laid the foundation for the creation of thousands of tokens representing various assets, such as cryptocurrencies, utility tokens, security tokens, and even non-fungible tokens, which demonstrate the potential uses of tokenization in representing digital and physical projects.

This was followed by the first exchange issuance and initial token offerings. The U.S. Securities and Exchange Commission coined the term "security token offering" in 2018, paving the way for regulated tokenization and giving rise to solutions that comply with regulatory requirements.

These developments have paved the way for the tokenization of real-world assets to take center stage. They continue to serve as catalysts for transformation and technological advancements in the financial services sector, paving the way for ongoing new applications. 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.

Drivers of Trade Asset Tokenization

financing needs of small and medium-sized enterprises

Global trade is expected to grow by 55% over the next decade, reaching $32.6 trillion by 2030. However, there is a significant gap between trade financing demand and supply, especially for small and medium-sized enterprises in developing countries. The trade financing gap increased from $1.7 trillion in 2020 to $2.5 trillion in 2023, a growth of 47%. This represents a huge untapped market opportunity.

Investor demand growth

According to the report, by 2024, 69% of buying companies plan to invest in tokenized assets, up from 10% in 2023. Investors plan to allocate 6% of their portfolios to tokenized assets, a figure that is expected to rise to 9% by 2027. Tokenization is not a fleeting trend, but a fundamental shift in investor preference.

Bank Incentives

The implementation of Basel IV will require banks to formulate growth strategies through modernized distribution business models. By utilizing blockchain-based initiated distribution, banks can de-recognize assets from their balance sheets, reduce regulatory capital, and facilitate efficient asset initiation. This "digital initiated distribution" strategy aimed at trade finance assets can enhance return on equity, expand funding sources, and improve net interest income.

Four Major Advantages of Tokenization

1. Improve market access: Tokenization has opened the door to emerging markets for a broader group of investors.

2. Simplifying Trade Complexity: Tokenization provides a platform to address trade complexity, particularly for deep supply chain financing.

3. Digital Securities: Tokenization expands the pool of investable assets and simplifies processes through the programmability of smart contracts and AI automation.

4. Reducing information asymmetry: Utilizing blockchain for tracing underlying assets helps to reduce information asymmetry between issuers and investors.

Ways to Participate in the Tokenization Market

1. Adoption: Investors should start with education and participate in pilot programs to build confidence in tokenized asset allocation.

2. Collaboration: Market-wide cooperation is crucial for achieving tokenization. Banks, financial institutions, technology providers, and others should work together to create a supportive environment.

3. Promotion: Governments and regulatory agencies should formulate policies that encourage global trade and support communities, establishing a clear and balanced regulatory framework.

Through these efforts, tokenization is expected to become a game changer in global trade, bringing new opportunities to investors, businesses, and the entire financial ecosystem.