Tokenization Enables New Capabilities in Trade Finance

Trade finance is an integral part of global commerce, providing the necessary funding, insurance and risk management services to facilitate international trade. However, traditional trade finance is plagued by issues such as high costs and opacity. 

To overcome these problems, blockchain technology has been identified as a potential solution with its ability to provide a more efficient and transparent method of trade finance. One key component of blockchain technology that facilitates new forms of trade finance is tokenization.

Tokenization refers to the digital representation of real-world assets, such as stocks, bonds, commodities, or real estate, by converting them into tokens stored on a blockchain network. The blockchain network provides a secure and transparent ledger that records the ownership and transfer of these assets. These tokens can be traded on blockchain-based platforms, enabling more efficient and transparent transfer of assets. 

This process is made possible by blockchain’s architecture, which ensures that transactions are immutable, secure and transparent. This makes tokenization a powerful tool for revolutionizing trade finance by creating new financial instruments, reducing transaction costs and increasing transparency.

Future innovations in trade finance

Tokenization has emerged as a transformative technology that provides several advantages to trade finance and is expected to be worth USD 24 trillion by 2027, a figure that represents 10 percent of global GDP. 

Future impacts of the technology:

    • By converting real-world assets (RWA) into digital tokens that are stored on blockchain networks, tokenization enables new forms of financing that were previously unavailable. These new financing options can be tailored to meet specific needs, such as short-term funding for trade flows or longer-term investments in infrastructure projects. 

    • Tokenization also reduces transaction costs by eliminating intermediaries and streamlining the settlement process, resulting in faster and more efficient transactions. 

    • Tokenization can enable programmable assets – think of it as digital money that can be programmed to act in a certain way based on predetermined criteria using smart contracts. Use cases are plentiful including payroll, payments, treasury management and escrow – where instead of a trusted third party holding money while a sale takes place, a smart contract is programmed to hold the money and automatically release it to the seller once the legal requirements are filled. Programmability can benefit just about any financial product.

    • Tokenization introduces transparency by default by providing a verifiable and tamper-proof record of asset ownership and transfer; enhancing trust between parties and reducing the risk of fraud or error.

A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code.2

2 Frankenfield, Jake, Investopedia,

New forms of financing

Tokenization opens up new avenues for financing by enabling the creation of digital tokens that represent ownership of RWA, allowing for the development of new financial instruments that can be traded on blockchain-based platforms. 

For example, instead of relying on traditional financial instruments like letters of credit, a buyer could purchase a digital token that represents proprietorship of a commodity. This token could then be traded on a blockchain-based platform, enabling more efficient and transparent trade finance.

Reduced transaction costs

Tokenization has the potential to significantly reduce transaction costs in trade finance by eliminating the need for intermediaries such as banks or insurance companies by facilitating direct transactions between buyers and sellers. Subsequently, efficiency is increased. 

For example, tokenization can automate many of the processes involved in trade finance, such as Anti-Money Laundering (AML) and Know Your Customer (KYC) checks, smart contract execution and settlement.

In addition to reducing transaction costs, the automation of trade finance processes through tokenization can help to reduce the potential for errors and fraud, improving the overall security of the trade finance system. As such, the use of smart contracts can help to ensure that transactions are executed only when all parties have fulfilled their obligations, thereby reducing the risk of disputes and delays.

Increased transparency

In addition to enabling new forms of financing and reducing transaction costs, tokenization can also increase transparency in trade finance by utilizing a secure and transparent ledger on blockchain-based platforms to record ownership and transfer of assets; providing real-time updates on the possession and movement of tokens. This can help to reduce the risk of fraud and increase trust between buyers and sellers.

The increased transparency and traceability enabled by tokenization can have significant benefits for businesses, as it can help to reduce risk and improve the overall efficiency of trade finance. By providing a more secure and transparent method of recording ownership and transfer of assets, blockchain-based platforms can help to build trust between buyers and sellers, which is essential in the world of trade finance.

The increased transparency and traceability enabled by tokenization can help businesses to meet expanding regulatory requirements. In sectors such as finance and healthcare, regulatory compliance is essential, and tokenization can help to ensure that businesses are operating within the bounds of the law.

Increased interoperability

Interoperability is the ability of computer systems or software to exchange and make use of information. Today, a lack of interoperability is an obstacle to a seamlessly connected financial ecosystem, but trade finance can gain enormous benefit from tokenization with an increase in interoperability. Tokenized assets with greater interoperability have the potential to tie the vast financial ecosystem together in a way that optimizes the transaction experience, while creating the option for a single access point between new and existing platforms.

Swift, the global, member-owned cooperative and the world’s leading provider of secure financial messaging services, recently conducted successful experiments to attest to the value of interoperability of tokenized assets in connecting the world’s financial institutions.   

Increased efficiency

Tokenization provides businesses with increased efficiency by reducing the time and costs associated with traditional trade finance methods. Specifically, tokenization can streamline the process of raising capital for small and medium-sized enterprises (SMEs), which have traditionally struggled to access financing options due to their smaller size and lack of credit history.

In addition to facilitating access to financing, tokenization can also help businesses reduce transaction costs by eliminating intermediaries, such as banks or insurance companies, which are typically involved in traditional trade finance processes. This can result in significant cost savings for businesses, allowing them to allocate resources more efficiently.

Reduced risk

Tokenization reduces the risk of fraud and default in trade finance by leveraging blockchain-based platforms, providing a secure and transparent ledger that records ownership and transfer of assets, ultimately increasing trust between buyers and sellers. 

This is particularly valuable in supply chain finance, where tokenization enables more accurate risk assessment and management, thus reducing the risk of default. Additionally, tokenization facilitates more accurate and transparent credit scoring, which can further reduce the risk of fraud and default.

Tokenized trade finance and the future

With tokenization emerging as a promising technology that enables new capabilities within trade finance, interest among institutions and consumers alike continues to grow. By providing a more efficient and transparent method of financing, and in using the advantages of blockchain technology, trade finance is certain to evolve.

Only by identifying the best applications for these innovations, focusing on one or two that can provide the most impact in the shortest time and working with regulators to establish rules of the road, can successful adoption continue to accelerate. When commercial banks assess those efforts as satisfactory, we will see tokenization become an increasingly important component of trade finance, enabling more efficient, secure and transparent trade finance methods.

Want to learn more about Paxos’ regulation-first approach to tokenization and how it can transform your business?

Featured articles

Blockchain, Crypto &
the Modern Enterprise

Our monthly newsletter covers the latest perspectives and important topics focused on the crypto landscape for enterprises. Subscribe to stay informed!