As tokenised assets move beyond the realm of blockchain and decentralised-finance start-ups and into traditional finance, mainstream lenders are ramping up experiments with the tokenisation of real-world assets in a bid to drive adoption and open up new markets. 

With Goldman Sachs concentrating thus far on the tokenisation of “vanilla” assets such as fixed-income government bonds, Standard Chartered has highlighted trade finance assets, a still largely untapped asset class, as a major driver for the tokenised asset space, creating a new market that can help in bridging the $2.5tn global trade gap.

Trade finance assets, such as export and import loans, letters of credit and bills of lading, are at present an “attractive yet underinvested” asset class, Standard Chartered noted in a recent research paper co-written with consulting firm Synpulse. The bank blames this underinvestment on a “lack of familiarity, pricing inconsistency and operational intensity”, with assets widely seen as complex due to the multi-party and cross-border nature of capital and goods movement globally. 

“We’re not deploying the capital where it’s needed,” says Kai Fehr, global head of trade and working capital at Standard Chartered. “We need to find a way to finance the supply of the supplier […], we need to find a way to find the cotton farmer in Africa, we need to find a way to finance the [small to medium-sized enterprise].”

Fehr says that many in the industry have looked towards distributed ledger technology or digitalisation of trade processes to address such funding gaps. 

The global trade finance gap grew to a record $2.5tn in 2022 from $1.7tn two years prior, according to the Asian Development Bank’s Trade Finance Gaps, Growth, and Jobs Survey published last year. Although demand for trade finance surged post-Covid, heightened economic risks left finance more difficult to secure, according to the ADB.

The ongoing trade finance gap is most felt in emerging markets and involves the spread between requests and approvals for financing to support imports and exports.

Standard Chartered also predicts that tokenisation will better enable “deep-tier” financing to reach SMEs further down in the supply chain that frequently lack scale, and are therefore often locked out of access to conventional sources of trade financing. 

Fehr argues that while there is investor appetite for trading on these assets, trade finance operates largely “as a closed shop”, barring entry to all but larger institutions.

“Only banks deal with banks, and execute this through a master risk participation agreement,” he adds. “That’s where the [tokenisation] technology comes in; instead of our closed circle of institutional investor executing distribution of trade assets on a paper trail, we make it a widely investable asset class.”

Project Guardian, run by the Monetary Authority of Singapore, is a collaborative initiative between policymakers and the financial industry to enhance liquidity and efficiency of financial markets through asset tokenisation.

Working in conjunction with 11 financial institutions, Project Guardian tested structures across wealth management, fixed income, foreign exchange and trade finance. The results of the tests could have significant impact in the paper-dependent world of trade finance. 

As part of Project Guardian, Standard Chartered developed an initial token offering platform, which successfully simulated the placement of $500mn in asset-backed security tokens backed by trade finance assets on the public blockchain Ethereum. Through this initiative, Standard Chartered tested an end-to-end process, from structuring to distribution, including a simulated default scenario.

Run by the Bank for International Settlements Innovation Hub, Project Dynamo explores how institutional investors can be encouraged to finance SMEs through the programmability and transferability of digital trade trade tokens, such as letters of credit and bills of lading on a public blockchain.

The prototype makes use of non-fungible tokens and smart contracts for SME finance. It builds on the 2020 Trade Finance TechChallenge, a joint initiative conducted by the BIS Innovation Hub Hong Kong Centre and the Hong Kong Monetary Authority, which studied the needs of, and challenges faced by, SMEs when accessing trade finance.

Project Dynamo continues Standard Chartered’s exploration of blockchain technology and decentralised finance to enable financing in the past, says Steven Hu, head of digital assets, trade and working capital at the bank. 

“We investigated the possibility of using a stablecoin as part of supplier financing, and that stablecoin is based on the tokenised version of the bank guarantee,” he adds. 

One of the lessons learned from Project Dynamo, says Hu, is that there is a need for global regulatory parity to enable tokenisation in deep tier supply chain finance on a cross-border basis. 

“The challenge is that there are inconsistent regulators and the legal framework jurisdictions, due to the nature of the supply chains, are located in different jurisdictions,” says Hu. “Secondly, we have seen that SMEs are very interested in the digital trade token.”

The next three years are critical, says Hu, especially when it comes to engaging with global regulators to achieve clarity and alignment on the use of tokenisation assets.

“The secure environment created by clear governance by the regulator will change [investor] appetite,” says Fehr. However, he points to the presence of a real-world asset behind the tokenisation — such as solar panels in Saudi Arabia — as “the attractive part” of this market. 

Fehr describes tokenised trade finance assets favourably compared to other digital assets such as the cryptocurrency bitcoin. 

“What exactly am I investing in?” he asks. “Trade finance assets are real-world assets; we can explain what you are [investing in],” he adds.