How Tokenised Private Credit (TPC) proves the real use case of tokenisation
The economy is moving into the digital assets space. If a couple of years ago the conversations were merely theoretical around the fact if tokenisation is happening, these days it’s not even a question: we’ve seen the giants of traditional finance utilising the Blockchain technology for instant execution and cost reduction.
The market opportunity is massive: BCG projects tokenised assets reaching $19T by 2033. Just as with any major trend in financial, tech or any other industry, when it really takes off and everyone picks it up, everyone wants to be a part of it: ‘Let’s tokenise everything!’
Sounds good and while tokenisation as a technological innovation has well pronounced benefits, some of which include:
- Near-instant settlement – much faster than traditional intermediated systems.
- Transparency – immutable, real-time, single-source-of-truth records.
- Programmability – smart contracts allow for “if/then” rules to automate financial, legal, and operational tasks
- Composability – different tokenized assets can interact seamlessly on programmable blockchains,
It’s becoming more and more apparent that it creates tangible level ups for some use cases while just adding complexity in others.
In other words: if your value proposition does not depend on the assets being tokenised, you most probably would be better off building it on traditional rails because you would be adding more friction than real value. In order to really benefit from tokenisation, it has to be a use case with something that can only be done thanks to the unique characteristics of digital tokens.
Private credit is one of such use cases: this traditionally illiquid asset class has rapidly become the largest Real World Asset (RWA) tokenisation category, exceeding $14 billion and representing over half of the total RWA market of $24 billion (excluding stablecoins as by far the largest tokenisation category to adjust for impact).
Total RWA value, rwa.xyz
What does tokenisation unlock for private credit that makes it a valuable asset class to tokenise?
Private credit is an inherently illiquid asset class and is historically mismatched with short and mid-term money markets. Without diving much into the traditional finance here, it’s due to the combination of factors that constitute the private credit nature:
- Private credit deals are usually bespoke and negotiated privately between the borrower and the lender which makes them different from standardised instruments, such as bonds and listed equities.
- That customisation leads to the second factor which is: lack of standardised secondary market liquidity: the more tailored your parameters are, the more precise matching needs to happen
- In addition to that, most of the private credit instruments are held to maturity because this is where the most upside for the lender happens, which also doesn’t contribute to the secondary market depth.
Knowing what we know now from this quick TradFi lesson, what do you think can help to make private credit a bit more mobile?
One of the most powerful concepts unlocked by tokenisation is collateral mobility. Remember the benefits of tokenisation described above? All of them allow to take a very fragmented collateral scattered across various institutions and make it a valuable asset - yes, you guessed right, through transparency and traceability, instant transfer and programmability.
It would be an inherently difficult task to pledge private credit in its traditional form as a collateral for any transaction private or corporate lenders might want to execute on both TradFi and DeFi sides. And here is where the actual real life benefit of tokenisation becomes that one missing piece: private credit in its tokenised form becomes far more usable. How?
Sophisticated TPC products, such as mF-ONE is a TPC product issued by Midas and managed by Fasanara Capital (a $5bn private credit fintech lender), consist of various layers that coordinate liquidity:
- Instant liquidity: tokenised US Treasuries or similar for instant redemption (10% allocation)
- Intermediate liquidity: a vault that runs delta-neutral trading strategies and provides weekly liquidity (10% allocation)
- Core private credit: Main allocation - private lending to the FinTech sector and digital assets arbitrage strategies
Such products in tokenised form are specifically designed to bridge the gap between the two worlds: they remove the mismatch between the private credit illiquid features and DeFi money market with short-term liquidity.
By overcoming those barriers with the help of tokenisation, TPC can be used as a collateral in DeFi markets, such as Morpho. Fasanara mF-ONE shows a real-world tokenisation use case for the product design tackling liquidity, valuation, and DeFi integration challenges. It is one of the first institutional-grade private credit products integrated with the universe of DeFi capabilities.
mF-ONE TPC used as a collateral on Morpho, https://app.morpho.org
It solves the maturity mismatch problem with liquidity sleeves, oracles, and instant redemption capabilities.
Another remarkable example of TPC collateral mobility superpower is Centrifuge Tinlake Pools: tokenised freight-forwarding receivables and merchant cash advances aggregated together and totaling over $200M accepted as collateral in MakerDAO.
These use cases provide an indication of the size of the market and the level of sophistication of transaction flows that can be achieved through tokenisation. TPC use cases are to be adopted by institutions with the wave of institutional grade products to follow across private credit, trade finance and similar products.