Digital marketplaces and tokenizations represent a potential growth avenue for the rapidly evolving private credit market. According to a new report from S&P Global, tokenization, in particular, is poised to solve some of the underlying challenges inherent in private credit, while improving efficiency and enabling broader investor participation.
The report, released in October 2024, explores how tokenization could unlock new opportunities in private credit by enabling fractional ownership on blockchain platforms, mitigating liquidity risks, and addressing operational inefficiencies that deter many investors.
Private credit refers to a type of non-bank loan generally offered to businesses but also to individuals. In the private credit market, investors provide loans to entities or individuals who may have difficulty accessing credit from banks or public markets. Because of the increased risk, investors generally earn higher interest rates on private credit than on bonds or other debt investments.
Despite these prospects, many investors are still hesitant to participate due to the inherent challenges associated with private credit. A survey carried out at the end of 2023 by Coalition Greenwich revealed that a majority (70%) of wealth and asset managers would have allocated more to private credit investments if there had been no liquidity risks and/or high management fees. Additionally, a significant share (38%) of respondents reported concerns about transparency.
It is on these questions that tokenization offers transformative potential. Tokenization makes it easier to trade fractional assets on digital markets, making private credit more accessible by improving liquidity. Additionally, the use of smart contracts reduces back-office costs and improves operational workflows. Finally, shared ledgers enabled by the use of blockchain technology improve transparency and therefore trust through immutable, real-time records of ownership records and transaction history.
Strong growth potential
Although it is still in its infancy, the tokenized private credit market is growing rapidly. According to S&P Global, there is currently about $500 million in tokenized private credit worldwide, but this market has surged 66% over the past 18 months.
While the private credit market as a whole currently represents approximately $1.7 trillion in investment globally, there remains significant room for growth, suggesting a positive outlook for the market in the years to come .
Diving into the current state of the tokenized private credit market, the report notes that there are currently two main ways to tokenize private credit: first, by tokenizing existing private credit funds like Hamilton Lane’s SCOPE fund, which includes business loans; or by creating tokenized debt directly on decentralized lending platforms.
Currently, decentralized platforms make up the bulk of the tokenized private credit market. Centrifuge, for example, is a specialized blockchain designed to allow individuals and businesses to borrow against traditional financial assets from decentralized finance (DeFi)-based lenders. The platform had $289 million in active loans outstanding as of July 26, 2024, focused on consumer asset-backed securities (ABS), real estate bridge loans and trade finance.
London-based digital finance company Greengage has taken a different route, focusing instead on financing small and medium-sized enterprises (SMEs). The company announcement in July, a partnership with Coinbase to issue tokenized private credit to provide e-money account services to SMEs.
Asset tokenization is gaining momentum
Asset tokenization, which refers to the process of digitizing ownership rights over physical or intangible assets, is gaining traction in the financial services industry. By leveraging blockchain technology and smart contracts, tokenization enables financial institutions to improve efficiency through programmable and composable financial instruments. It also helps increase liquidity through splitting and unlock new sources of income through innovative financial products.
Formerly known as Onyx, Kinexys is the permissioned blockchain of banking giant JP Morgan. The platform allows users to trade tokenized assets such as US Treasuries and mortgage-backed securities, and has exceeded US$1.5 trillion in notional value, processing on average more than US$2 billion US dollars per day in transaction volume.
Likewise, Goldman Sachs spear in January 2023, its digital assets platform in partnership with blockchain software provider Digital Asset. Using the Canton Network blockchain specifically designed for Digital Asset, Goldman Sachs’ platform facilitates the issuance, registration, settlement and custody of various tokenized assets.
While tokenization adoption remains nascent, the market for tokenized assets is gaining momentum. Roland Berger estimates that the market size of tokenized assets reached US$400 billion in 2023. By 2030, asset tokenization is expected to grow to become a market worth at least US$10 billion, representing a 40-fold increase in the value of tokenized assets between 2022 and 2030.
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