How Crypto Tokenization Can Go Wrong (and How to Make It Right)

Money doesn’t make the world go round; credit does. Credit predates any known form of currency and was in use at least as far back as the ancient civilization of Sumer around the year 3500 B.C.E. In Sumer, citizens could get loans for agricultural purposes, later paying these back via a percentage of their crop. By comparison, the oldest coin-minting operation ever discovered only dates back as far as about 640 B.C.E.

Ralf Kubli is a board member at the Casper Association.

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. But if this is the case, why is the move toward tokenization and digitization so focused on money?

The credit landscape today

Today, credit remains the foundation of all finance. However, we are also navigating unprecedented times. There is a credit crunch looming in the U.S. as the broader economic outlook worsens. As a result, fewer loans are being offered and those that are have become more conservative resulting in a $2 trillion gap of unmet demand for finance.

This disproportionately harms small and medium enterprises (SMEs), which are generally in the most need of financial support as they get off the ground.

Part of the cause behind this is that large capital providers struggle to conduct adequate due diligence and risk management for their SME debt, resulting in the lack of options for borrowers. Instead, these lending platforms only focus on high-quality borrowers, ignoring many SMEs, even though they could generally charge much higher interest rates.

See also: The Tokenization of Real-World Assets (RWA) Explained

The situation stems from the fact that capital providers are stuck in a catch-22 situation. To provide opportunities for securitization on a larger scale, lenders would need to work with higher-risk borrowers. This would inevitably lead to higher default rates, which most capital providers won’t tolerate. Subsequently, the overall volume of credit remains relatively small, leaving many borrowers out of luck.

Enter tokenization

Fortunately, there is a potential fix here. The rise of blockchain technology…