Why tokenization of private credit is transforming the financial markets

As the banking sector reduces its lending, the private credit market is entering a structural growth trend. A new market structure is forming where private lenders and private equity firms take on the role of providing financing, and tokenization of private credit could be a game-changer. Sidney Powell, CEO of Maple Finance, points out that while traditional tokenization discussions focus on government securities and money market funds, private credit itself is the true growth story.

Background of the Structural Expansion of the Private Credit Market

The private credit market is already experiencing robust growth. Traditionally dominated by banks, there is a rapid shift toward large credit managers and private equity firms like Apollo. This is not just a market share shift but a fundamental structural change in the financial intermediation function itself.

This shift is driven by increased regulation and higher capital requirements making traditional banks more cautious in their lending stance, while institutional investors such as pension funds and insurance companies seek higher yields and are increasingly turning to private credit opportunities. As the demand and supply dynamics change, the market itself is expanding significantly.

Three Fundamental Challenges Driving Tokenization

So, why is private credit particularly suited for tokenization? The answer lies in three structural challenges faced by the market.

Liquidity Constraints are the first challenge. Private credit mainly trades over-the-counter (OTC) in bilateral markets and is not listed on public exchanges. Selling these loans is difficult, and executing transactions takes time. Compared to stocks and money market funds, the market lacks depth among participants.

Lack of Price Discovery Mechanisms is the second challenge. There are no benchmark prices updated daily on exchanges, so market participants set prices based on their own judgment. As a result, assets with similar risk profiles can have widely varying prices, making it difficult to establish fair market value.

Lack of Transparency is the third challenge. Reporting standards are not unified, and there is often insufficient disclosure regarding leverage levels, collateral quality, and ultimate risk exposure. Powell states, “Precisely such markets are where tokenization makes sense,” noting that on-chain systems could gradually resolve these fundamental opacity issues.

Transparency Revolution and Credit Default with On-Chain Implementation

Implementing private credit on-chain would record the entire lifecycle—from borrowing to repayment or default—transparently. This allows market participants to monitor asset status in real-time.

Interestingly, Powell describes “on-chain as not a bug but a feature of default.” Defaults are common in credit markets, and the problem lies in their opacity and concealment. Fraudulent activities like double collateral on receivables become harder to execute when assets are pooled within a “single token set” through tokenization.

In traditional private credit markets, problems surface late and then rapidly spread, creating a vicious cycle. For example, in the case of a first-tier auto parts manufacturer, undisclosed off-balance-sheet liabilities and failed refinancing led to significant impacts on multiple private lenders. With a transparent, auditable blockchain-based system, such issues could be detected earlier.

Institutional Investors’ Yield Pursuit Accelerates Private Credit Expansion

In the coming years, inflows into private credit are expected to accelerate further. Institutional investors managing the largest balance sheets—pension funds, insurance companies, asset managers, and sovereign funds—must seek higher yields.

Looking at the macro environment, government debt has reached tens of trillions of dollars, and achieving a balanced budget remains politically difficult. In this context, inflation effectively acts as a tax on purchasing power, increasing the relative value of real assets and high-yield investments. This structural force is guiding institutional investors toward private credit opportunities.

Powell also notes efforts to streamline regulations and expand supply-side economic growth, but believes that structural debt overhangs continue to favor real assets. In other words, the expansion of the private credit market is not just a temporary trend but a medium-term shift rooted in macroeconomic structural factors.

The Future of Tokenization Making Private Credit Markets Safer

According to Powell, tokenization of private credit is expected to significantly reshape financial markets over the next few years. Implementing transparent, auditable blockchain systems will broaden investor bases and reduce friction in secondary markets.

In contrast, tokenization of stocks may offer limited benefits. As broker fees approach zero, additional efficiency gains yield diminishing returns. The core issues faced by private credit—opacity and liquidity constraints—are more effectively addressed through tokenization technology.

Furthermore, with the development of on-chain lending, crypto-backed loans are expected to move toward evaluation by traditional credit rating agencies. Once rated, these financial products could be incorporated into mainstream fixed-income investment strategies, transforming from “high-quality assets” to “investment-grade assets” within the same framework that assesses corporate and sovereign credit.

Tokenization of private credit is not merely a technological innovation but a potential structural turning point that could promote transparency and efficiency across the entire financial market.