Tokenization could help to address some inherent challenges in private credit, potentially facilitating enhanced liquidity, efficiency, and transparency.
- Liquidity – Tokenization could ease the process of buying into private credit funds and of trading shares. This could broaden the range of investors, provide easier access to the asset class, and expand the base of capital for private credit borrowers.
- Efficiency – The opportunity to save back-office costs through smart contract templates could lead to lower transaction costs and management fees.
- Transparency – The transaction flow of private credit assets would be much more visible due to real-time settlement and the use of a shared ledger, which provides data on underlying assets at all times.
The firm, then known as Cadence, issued its first tokenized private debt product in 2019, intending to cut back-office costs by standardizing and re-using smart contract templates for structured offerings. It ran into three problems at the time:
- Regulatory challenges. The company had to structure offerings in the real world within existing regulations and then create a mirrored contract on chain.
- Lack of efficiencies. Creating mirror contracts and putting them on-chain was more expensive than expected. This often offset all of the revenue from smaller transactions.
- Demand. There was insufficient demand for tokenized debt on-chain, probably due to the limited number of investors set up to invest meaningfully in tokens.
We believe the tokenization journey is not a straight path. Benefits for liquidity, efficiency, and transparency all come with trade-offs, and challenges remain. Regardless of technological innovation, the quality of the credit remains of paramount importance. Whether on-chain or off, credit is credit. The quality of the borrower is what ultimately matters.