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Introduction
The financial landscape is undergoing a digital revolution, and one exciting innovation is the rise of tokenized bonds.
In this article, we will give you a brief overview of this new frontier, about what tokenized bonds are, how they work, their potential advantages and drawbacks, and how they might reshape the future of investing. We’ll also talk about a recent development: a new tokenized bond issued for Mikro Kapital, one of the leading companies in the microcredit industry.
Tokenized Bonds: A Digital Transformation
Tokenized bonds represent a revolutionary approach to traditional bonds: the traditional ones are considered a relatively stable investment option, offering predictable returns with lower risk compared to other asset classes, however, they come with limitations. Trading alternative bonds typically involves intermediaries, most of which are illiquid and difficult to sell on the secondary market. Additionally, the alternative bond market is often fragmented, with limited access for smaller investors due to high minimum investment amounts.
Tokenized alternative bonds aim to bring about a transformation, in terms of accessibility and transparency. In particular, tokenized bonds leverage blockchain technology, the same technology powering cryptocurrencies: blockchain is a secure, distributed ledger system that tracks ownership and transactions transparently and immutably.
Two key benefits of tokenization are:
- Digital Representation: In a tokenized bond, the bond itself is transformed into a digital token, representing one of the possibilities. However, the bond can also be a native token, where the Smart contract itself acts as the bond, eliminating the need for a traditional bond, and the contract is native to the blockchain
- Fractional Ownership: Tokenization allows bonds to be divided into smaller units. In line with the requirements of the platform and the applicable legislation, this enables fractional ownership, making them potentially more accessible to a wider range of investors with lower minimum investment requirements.
Advantages of Tokenized Bonds
Tokenization offers several potential advantages over traditional bonds:
- Increased Efficiency: Blockchain streamlines the entire process, eliminating the need for intermediaries. This can lead to faster settlement times and potentially lower transaction costs.
- Enhanced Liquidity: Tokenized bonds can be traded on digital exchanges 24/7, unlike traditional bonds with limited trading hours. This potentially increase the liquidity and offers investors greater flexibility to buy and sell their holdings.
- Fractional Ownership: As already mentioned, tokenized bonds allow for fractional ownership, making them more accessible to smaller investors, to the extend that they fulfil the tokenization platform’s onboarding requirement.
- Transparency and Security: Blockchain technology ensures a secure and transparent record of ownership and transactions.
- Programmability: Smart contracts, self-executing contracts on the blockchain, can automate coupon payments and other bond functions, further streamlining the process.
Mikro Kapital’s Tokenized Bond for Microcredit
Mikro Kapital is one of the leading companies in the microcredit industry, supporting small and medium-sized enterprises (SMEs) in developing economies. Their collaboration with Obligate and Bitfinex, leading digital asset platforms, highlights their aim to streamline capital flow and enable growth opportunities globally, which aligns well with microfinance goals.
The first experience of MKK with tokenized bonds was with Bitfinex, one of the most historical and leading exchanges in the crypto industry, the company that made the most important stablecoin in the world, Theter.
Recently, Obligate announced its new digital bond issuance for Mikro Kapital in April 2024; this issuance is also significant because it represents Obligate’s first use of the Base network, an Ethereum L2 solution by Coinbase.
The bond issuance is part of Mikro Kapital’s securitization fund called Alternative, which is directly the issuer of this native digital token. The proceeds will be directly invested in the network and activities of Alternative.
Securitization funds in microfinance typically pool smaller loans to create a tradable security, similar to a tokenized bond. This implies that investing in this specific tokenized bond would directly support microcredit initiatives facilitated by Mikro Kapital’s network.
Potential Drawbacks of Tokenized Bonds
While promising, tokenized bonds are still a nascent technology and come with some potential drawbacks:
- Regulatory Uncertainty: The regulatory environment surrounding tokenized bonds is still evolving. This uncertainty can deter some investors and hinder widespread adoption. However, the solution adopted by Mikro Kapital is in compliance with local law and regulation, as the prospectus has been designed in line with the specific guidelines of the respective tokenization platform, being Bitfinex regulated in Kazakhstan or Obligate, following Swiss requirements.
- Technical Complexity: Blockchain technology and tokenized assets can be complex for new investors to understand. Educational initiatives are crucial to bridge the knowledge gap.
- Market Volatility: The volatility of a tokenized bond depends on the digital currency used to purchase it. Stablecoins offer minimal volatility, while cryptocurrencies can be more volatile. The underlying asset of a tokenized bond may still be susceptible to market fluctuations, impacting its value. The advantage of a RWA Token, Real World Asset Token, is to link its value to a traditional and tangible underlying, that any investors can understand and evaluate.
- Cybersecurity Risks: Blockchain technology, while secure, is not immune to cyberattacks; investors need to be aware of these risks and choose reputable platforms.
The Future of Tokenized Bonds
Tokenized bonds offer a glimpse into the future of finance, potentially revolutionizing the way we invest in debt instruments. By leveraging blockchain technology, they offer increased efficiency, liquidity, and accessibility. As regulatory frameworks catch up and investor education improves, tokenized bonds have the potential to democratize investment opportunities and attract a wider range of participants.
For sure, addressing current limitations like regulation and technological complexity is crucial for widespread adoption. Additionally, ensuring robust cybersecurity measures and investor education will be essential for building trust in this innovative financial instrument.
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