While the first generation of cryptocurrencies, like Bitcoin and Ether, has long been the dominant use case of blockchain technology, several other applications have mushroomed out of the decentralized, distributed ledger of records. One such form is tokenization, an idea that can solve many trade financing problems common in businesses. However, some business persons are worried whether tokenization is merely conceptual or will transform the trade financing sector. To answer this question, we need to understand what tokenization is and develop a clear picture of tokenization; we must define what blockchain is.
Separating the ‘Block’ from the ‘Chain.’
Blockchain is a network (chain) of computers that share a similar record of transactions (blocks). The record of transactions is stored on all the connected computers, and these computers validate them.
Based on this highly trustless model, blockchain can be developed, modified, and used in various ways, and act as ‘tokens.’ The tokens can be used as a utility to facilitate payments or to back real-world assets.
Tokenization and Trade Finance
Tokenization can solve many challenges facing trade finance through the deployment of smart contracts, shipment tracking, and buyer confirmations. One of the significant benefits it could bring to trade finance is freeing up the liquidity of illiquid assets, such as unpaid invoices.
Unpaid/late invoices are a pain point for small and large-scale businesses but are more severe for small to medium-sized businesses (SMBs). Statistics show that one in five SMBs collapse within their first five years of operation majorly due to unpaid invoices. By promising to unlock the illiquidity of these invoices, tokenization could become a game-changer for such SMBs. But how will it achieve that?
The use of tokens to represent underlying real-world assets- or unpaid invoices- on a blockchain would imply that traditional banks are no longer needed to issue money against invoices. Instead, the invoices would be tokenized, opening up financing options for SMBs, as a large pool of investors- not just banks- could take part in the buying and selling of these tokens. Since blockchain is an immutable record of transactions, the security of investors and traders is guaranteed.
Is it a Practical Concept?
While theoretically exceptional- especially for SMBs- the worry is: is it realistic, or is it just conceptual?
Fortunately, it is realistic, and already there are practical applications of tokenization in trade finance in the area of invoice financing marketplaces. Although not yet open to the public, these marketplaces maintain the integrity by applying blockchain to store records of all transactions- facilitating a single source of data truth- and guarantee quality by pre-vetting the investors who buy these invoices. Besides, they enable SMBs to secure the best market rates because of the competitive nature of the invoice financing marketplaces.
Although the tokenization of trade finance is not yet available to the public, it has already crossed the reality line. As the masses flock the digital asset economy and businesses acknowledge the benefits of blockchain in their trade finance models, blockchain will likely significantly transform the way enterprises approach trade finance in the coming years.
Tokenizer Blockchain Banking Platform
The Tokenizer is a blockchain investment banking system that champions accessible, transparent, and safe financial services. We believe that everyone deserves equal access to investment and fundraising opportunities. That is why we are democratizing access to capital for investors and fundraisers by making investing and fundraising efficient, safe, and accessible to everyone.
Are you in need of raising funds or investing in security tokens? Apply to raise funds through Tokenizer by filling this application form. If you want to invest in security tokens, sign up for a Tokenizer Investment Account today, and if you want to liquidate and trade-in Asset-Backed Tokens, we have a decentralized exchange designed for you! You can also contact us to order a metallic crypto card at $149 only.
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