Credit is the true foundation of finance. Not money or individual payments, but payments over time, aka cash flows. Cash flows allow entities to predict future financial states and develop strategies based on that information, which is why it’s often regarded as the lifeblood of the world economy. Ralf Kubli, board member at the Casper Association, explains why tokenization is the answer to unlocking credit for small and medium enterprises (SMEs).
The current credit crunch in the U.S. has resulted in a $2 trillion gap of unmet demand for finance, disproportionately harming SMEs. This is because large capital providers struggle to conduct adequate due diligence and risk management for their SME debt, resulting in the lack of options for borrowers.
Fortunately, the rise of blockchain technology is reshaping how many companies trade their financial assets. Blockchains allow existing real world assets (RWA) and capital to be tokenized, i.e., representing certain assets, be they tangible, intangible or financial, on-chain as digital tokens. This tokenization industry is projected to reach a valuation of $3-$5 trillion by 2030.
Real estate and equities are currently the predominant forms of tokenized assets, according to a recent report from Digital Asset Research. The benefits of tokenization include increased liquidity, faster settlement, lower costs and better risk management of financial assets.
However, most tokenization of financial assets is just that: digital representations of reserves held by companies. To bring about all the benefits of tokenization and ensure we avoid another recession caused by bad debt and leverage, all tokenized financial assets need to not only digitize the asset itself but also define its underlying cash flows and liabilities as well.
To bring about all the benefits of tokenization and ensure we avoid another recession caused by bad debt and leverage, all tokenized financial assets need to not only digitize the asset itself but also define its underlying cash flows and liabilities as well. Ralf Kubli explains that this will open up many possibilities, most notably, it will greatly boost efficiency and transparency, inherently making the economy operate much more effectively.
This stands to boost innovation while simultaneously minimizing the risk that future financial meltdowns can ever again rattle global markets. Tokenization is the answer to unlocking credit for SMEs and ensuring the world economy operates in a healthy way.