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Tokenization of payment guarantees could lure alternative investors to trade finance asset class

Private wealth clients, niche asset managers and sophisticated trading firms could all have appetite for tokenized trade finance.

Photo: iStock

Reverse factoring has made it easy for many large organizations to provide financial assistance to their suppliers. However, this approach tends to be less effective in longer supply chains.

A possible solution can be found in the world of decentralized finance (DeFi), where the buyer’s payment guarantee can be recorded on a non-fungible token (NFT) that can be verified by every participant in the chain.

These factors offer a robust, highly scalable and extremely cost-effective means of value transfer
Jose Neif, BCB Labs

Tokenizing payment guarantees of large buyer invoices reaches deep into the supply chain. There is the technical challenge of creating a working NFT and a financial mechanism to incentivize suppliers at each stage of the supply chain to pass the NFT on to their own suppliers is also needed. This could take the form of a spread coded into the NFT smart contract.

Effective know-your-customer (KYC) is also necessary for all participants in the chain to ensure compliance with anti-money laundering (AML) and sanction-screening regulations.

“The combination of these factors offers a robust, highly scalable and extremely cost-effective means of value transfer, which has the potential to transform the payment-guarantee market,” says Jose Neif, head of BCB Labs at BCB Group.