Real-World Asset Tokenisation at Standard Chartered Bank

Key Functionalities of Real-World Asset Tokenization

1. Enhancing Liquidity: Tokenization transforms trade finance assets into digital tokens, which increases liquidity. Traditionally, trade assets have been less accessible and more challenging to invest in. However, tokenizing them opens these assets to a broader range of investors, offering more liquidity to previously illiquid markets. The digital tokens created from these assets can be transferred and traded easily, allowing investors to access and trade them more efficiently.
2. Fractional Ownership: One of the core features of asset tokenization is fractional ownership. This concept allows significant assets, such as trade finance, to be divided into smaller, transferable units. This enables a wider range of investors to participate in asset ownership, regardless of the asset size. By fractionalizing assets, tokenization allows smaller investors to access a share of high-value assets, promoting financial inclusion.
3. Risk and Cashflow Management: Tokenization provides greater transparency and control over risk and cash flow. Through creating digital tokens, assets can be allocated into different risk profiles—senior and junior tranches—each with its own reward and risk profile. For instance, senior tokens might offer more stable returns with lower risk, while junior tokens may carry higher risk with the potential for higher returns.
4. Automation and Efficiency: Tokenization leverages blockchain technology to automate many processes in managing trade finance assets. For example, smart contracts can manage the flow of funds, ensuring that payments are made automatically when specific conditions are met. This reduces operational inefficiencies and minimizes the need for intermediaries. As a result, investors and businesses can benefit from faster, more efficient transactions with fewer manual interventions.
5. Transparency and Traceability: Using blockchain technology, tokenized assets are fully traceable, and information about them can be recorded and tracked across the entire lifecycle of the transaction. This provides high transparency, which is critical for investors and regulators. Tokenization ensures that all parties involved have real-time visibility into asset performance, ownership changes, and transaction history, improving trust and reducing the risk of fraud.
6. Global Access and Inclusivity: Tokenization breaks down geographical barriers and enables global participation in trade finance assets. Investors from around the world can access these digital tokens and invest in trade finance opportunities previously restricted to local markets or large institutions. This inclusivity broadens the investor base and allows businesses in developing markets to access capital more easily.
7. Reduced Costs: Tokenization helps reduce the overall cost of transactions by eliminating intermediaries and automating many processes. Traditional trade finance transactions often involve multiple parties and manual processes, increasing costs and delays. With tokenization, the streamlined and automated processes help cut these costs, making trade finance more accessible and affordable for businesses and investors.
8. Improved Risk-Adjusted Returns: Trade finance assets, when tokenized, provide strong risk-adjusted returns. These assets tend to have low and high recovery rates in case of defaults, making them an attractive option for institutional investors. The ability to tokenize these assets further enhances their appeal by providing greater liquidity, transparency, and accessibility, which can improve investment outcomes.

Two Pilot Projects Demonstrating Real-World Asset Tokenization

1. Project Guardian: Tokenization of Asset-Backed Securities (ABS)

Standard Chartered led a successful pilot as part of the Monetary Authority of Singapore (MAS)-led Project Guardian. This pilot demonstrated how asset-backed securities (ABS) can be tokenized and traded on the blockchain.

Key elements of the pilot:

• Tokenization Process: Trade finance receivable assets were tokenized as Non-Fungible Tokens (NFTs), each representing a unique asset. These NFTs were then grouped into portfolios and allocated into senior and junior tranches based on risk profiles.
• Risk Management: The allocation into tranches was done to cater to different investor appetites for risk. Senior tranches offered more stable returns, while junior tranches carried higher risk but had the potential for higher returns.
• Creation of Fungible Tokens: Once the portfolios were created, fungible tokens were issued for each tranche, allowing investors to buy and trade these tokens. The senior tokens paid out a fixed coupon, while the junior tokens provided an excess spread as compensation for taking on more risk.
• Simulated Distribution: The pilot simulated the distribution of USD 500 million asset-backed security tokens on the Ethereum blockchain. Investors could participate in the offering and purchase these tokens, which they could then trade or hold in their digital wallets.
• Default Scenario Simulation: The project also tested how the system would handle a default scenario, showing that the tokenization process could manage such risks efficiently and transparently.

This pilot highlighted the potential for tokenization to unlock liquidity and investment opportunities in trade finance while demonstrating blockchain networks' ability to handle complex transactions securely and efficiently.

2. Project Dynamo: Digital Trade Tokens for Supply Chain Financing

Project Dynamo, a collaboration between Standard Chartered, the BIS Innovation Hub Hong Kong, and the Hong Kong Monetary Authority, aims to simplify supply chain financing through the use of Digital Trade Tokens.

Key elements of the pilot:

• Tokenized Supply Chain Payments: This project streamlined the supply chain by using Digital Trade Tokens for payments between anchor buyers (large corporations) and their suppliers. The tokens were programmable, meaning they could be set to execute specific actions, such as payment upon the delivery of goods or receipt of an electronic bill of lading.
• Smart Contracts: The project employed intelligent contracts to trigger payments automatically when certain conditions were met. For example, once a supplier has fulfilled their delivery obligations, the digital token could be converted to cash, allowing faster and more transparent payment processes.
• Collateralization of Tokens: Suppliers also had the option to use their digital tokens as collateral for loans. This provided flexibility and additional liquidity to suppliers, as well as tiny and medium-sized enterprises (SMEs) that often need help accessing traditional financing.
• Stablecoins and Blockchain Integration: The tokens were issued as stablecoins, backed by bank guarantees or ringfenced funds, ensuring their stability and giving investors confidence in their value. Using blockchain technology ensured that all transactions were traceable, secure, and efficient.
• Access to Deep-Tier Suppliers: One of Project Dynamo's key innovations was its ability to extend financing to deep-tier suppliers, or SMEs further down the supply chain. These smaller suppliers often face challenges in obtaining financing due to their lack of credit history or scale. By using digital tokens and smart contracts, Project Dynamo provided these SMEs with access to much-needed capital.

This pilot demonstrated how tokenization could revolutionize supply chain financing, making it more transparent, efficient, and accessible to smaller suppliers. The project also showcased the potential for programmable tokens to automate complex transactions and reduce the reliance on intermediaries.

Conclusion

In conclusion, the tokenization of real-world assets, especially trade finance assets, represents a major shift in how financial markets operate. By leveraging blockchain technology, tokenization enables greater liquidity, fractional ownership, risk management, automation, transparency, and global access to previously hard-to-invest in assets. The two pilot projects—Project Guardian and Project Dynamo—demonstrate the transformative potential of tokenization, showcasing how it can streamline asset-backed securities and supply chain financing. These innovations are paving the way for more inclusive, efficient, and transparent financial ecosystems, providing new opportunities for investors and businesses.