Tokenizing Loans With Blockchain Technology
The tokenization of debt instruments will bring new opportunities to the marketplace.
The growing market for tokens is bringing new products that can transform how capital is managed and distributed. A new class of global investor has the potential to revolutionize the ways in which we support development projects and distribute liquidity. The management of debt instruments will play a critical role in these developments and we are already beginning to see innovative products arriving on the market.
Tokens are utilities or assets which are digitally represented on the blockchain and are immutable in nature. There are several forms of token that exist on blockchains and most represent a security or utility offered by a company.
- Utility Tokens entitle their owners to purchase services and vote on a network.
- Non-Fungible Tokens represent something unique and are not interchangeable — such as digital art.
- Security Tokens are digital assets which derive their value from an external asset and are issued on a third party blockchain network.
- Asset-backed Tokens represent real-world or digital assets.
Tokens on a blockchain can be continuously and globally traded and are potentially more liquid than traditional securities. Their digital nature makes them easy to store and can eliminate settlement times. In the case of security tokens where the investor has registered with authorities, tokens can be returned to their rightful owner in the event of hacking or loss.
There are several key benefits that the tokenization of debt instruments bring. The dividend payments associated with loans can be programmed into the functionality of the tokens. This will ensure that investors receive their rewards without the friction associated with administration and banking. Legal obligations associated with such investments are also improved as they can be programmed into the functionality of the tokens. The holding period, eligibility requirements and investor rights can be coded into these products ensuring that they are regulatory compliant. As the tokens move through the blockchain they remain transparent and traceable which reduces the opportunities for fraud.
Some of the most important opportunities will be realized through the democratization of the lending process. Traditionally loans have tended to be awarded to larger borrowers denying access to capital for the poor. Because tokens can be fractionalized into small portions it is possible to make small or micro-loans. This fractional nature allows small individual lenders to participate in the process opening the market up to greater numbers of investors.
Loans are now beginning to be offered in various forms through the process of tokenization. At the beginning of this year, Silvergate and Bitstamp launched Bitcoin collateralized loans. The new product called SEN Leverage allows customers to borrow USD loans which are collateralized by Bitcoin. Silvergate will offer a 24/7 service to issue loans and accept repayments. Exchanges such as Bitstamp will be used as third party custodians for the cryptocurrency collateral. Silvergate recently announced that it issued $22.5 million in loans collateralized by Bitcoin during July.
Recently Expobank in Russia issued a loan to Mikhail Uspensky collateralized by his WAVES tokens. Uspensky purchased WAVES in 2018 with the intention of bringing them to market through an ICO. When that failed to transpire he began to look for other opportunities and Expobank was willing to experiment with new loan issuances.
Tokenization of loans allows the loan to be divided into tokens which can then be traded on secondary markets. There are important opportunities here for small businesses that would usually struggle to raise capital without parting with their intellectual property. Tokenized loans can be sold to investors who are willing to maintain their investment in return for dividends in the longer term.
Providing liquidity to support education, health and development projects has the biggest potential for global impact. This form of funding is similar to crowdfunding but brings the added benefits of investment rewards and auditing. When global investors can invest directly in loans for development projects we may begin to see improvements in the lives of the hundreds of millions who struggle to fund even the most basic amenities or social mobility.
Sonata Capital is registered in the Labuan International Business & Financial Centre, and invests in companies successfully exploiting the vast opportunities of the digital economy.
100% of the equity in our funds have been tokenised, and will be listed on digital securities exchanges in Labuan and elsewhere. The equity of Sonata Capital Ltd (LL16076) has also been tokenised, and the rights to the equity is represented by the SONATA security token issued on the Ethereum network.