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Over the past decade, the tokenized credit market has soared to new heights. The industry, which converts traditional credit products, such as loans, bonds, or other debt instruments, into digital tokens that exist on a blockchain, has helped to democratize the world of investment for more participants, with each token issued representing a fraction of the underlying credit asset. This fractionalisation allows the token to be easily traded, transferred, and managed on decentralised platforms.
To date, $10 billion in tokenized bonds have been issued by leading institutions, including the World Bank and the City of Lugano. The market’s growing popularity stems from the significant benefits it offers—enhanced liquidity, transparency, and accessibility. Investors can now buy and sell portions of loans or bonds, making these traditionally illiquid assets more flexible and tradable. Blockchain’s transparent, immutable ledger ensures that all transactions are secure and verifiable in real time, reducing fraud and increasing trust. Additionally, tokenized credit products open the door to a broader pool of investors by lowering entry barriers, allowing even small-scale participants to invest in assets that were once limited to large institutional players. As more financial institutions and platforms adopt tokenization, this market is expected to expand, transforming how credit products are issued, traded, and managed.
Yet despite this advancement, the growth of the tokenised credit market is still constrained by one critical issue: return on investment. Decentralized finance lending currently offers lower yields when compared to traditional lending markets, especially in the current high-interest rate environment.
This can be solved by providing funding for cross-border payments as it is an ideal use case to expand the tokenized credit market and unlock higher yields, offering consistent cash flows and a natural fit for blockchain’s speed and cost-efficiency.
The core challenges: Low yields and volatility
The total allocation of the tokenized credit market remains relatively small compared to the size of the multi-trillion-dollar global bond market. The limited allocation is largely due to challenges in liquidity, investor hesitancy concerning yields, and regulatory uncertainty.
Concerning returns, the tokenised credit market currently offers an average yield of around 9.65% on $10 billion of tokenised credit assets. While this might seem attractive compared to traditional bond yields, tractional private credit markets saw average yields of 12% from 2018 to 2023, leading many investors to still view DeFi as volatile and uncertain. Therefore, to unlock further growth, it is critical that the industry addresses yield-related issues and enhances investor confidence in the pioneering asset class.
Institutional investors demand not just high yields but also stability and predictability. In traditional credit markets, low volatility and reliable income streams are key drivers of investment flows, whereas the DeFi sector is still seen as nascent and volatile. The ecosystem needs to prove that it can generate attractive, risk-adjusted returns for both institutional and retail investors. This means improving the robustness of the platforms and expanding the range of available asset classes, such as into payments.
Increasing yields to boost growth
To drive greater adoption and attract more capital into tokenised credit markets, several strategies are necessary to make yields more attractive:
- Enhance liquidity. One of the key factors limiting yield attractiveness is liquidity, as tokenized assets must have deeper secondary markets to allow investors to exit positions easily without significantly affecting prices. This can be achieved by expanding the number of platforms that offer trading of tokenized debt assets, and increasing institutional participation can help create the necessary liquidity for more stable returns.
- Broaden asset classes. The tokenized credit market is currently focused on a narrow range of assets, such as mortgages and corporate bonds. However, to make yields more appealing, the market needs to diversify into other asset classes. Tokenizing revenue-generating assets like payments, real estate, and infrastructure projects could provide higher yields and open up new opportunities for investors who are seeking different risk-return profiles.
- Leverage stable asset classes. Integrating more stable, low-risk asset classes into the DeFi ecosystem could help balance the risk-reward equation. For example, tokenized government bonds or investment-grade corporate debt could offer lower but more stable yields, which may be attractive to institutional investors or pension funds looking for secure, long-term returns.
Finding new asset classes for tokenization
To ensure sustained growth in the tokenized credit market, new asset classes must be explored. The current landscape focuses heavily on fixed-income instruments, but there are untapped opportunities in sectors including real estate, intellectual property rights, royalties, and even carbon credits.
However, the payments industry presents the best asset class for the expansion of the tokenized credit market. Playing a fundamental role in all global commerce, the payments industry handles extremely high transaction volumes with largely consistent returns. Cross-border payments are of particular interest; each provider must maintain sufficient liquidity in each jurisdiction in which it operates to provide fast and low-cost transactions, forming a significant burden for aspiring founders and scaling payment companies.
This burden creates huge inefficiencies and locks up capital that could otherwise be invested or otherwise used more productively elsewhere. The tokenized credit market offers an effective solution to this problem, lending to cross-border payment companies to enable them to operate pre-funded accounts in more jurisdictions, reaching a market untapped by traditional lenders due to high perceived risks and archaic due diligence processes. Utilising on-chain collateral for loans and offering highly flexible lines of credit, the tokenised credit market can go where the traditional private lending market never could, gaining access to a key source of transaction volume and higher yields.
The future of tokenized credit markets
As the tokenised credit market continues to evolve, funding payments companies stand out as an important asset class that can generate higher yields and attract more capital, enabling the tokenised credit market to take the next step in its growth.
To ensure the broader DeFi ecosystem thrives, the sector must focus on enhancing liquidity, stabilising yields, and diversifying into new asset classes, be that the payments industry or any other sector with high demand for flexible, on-chain liquidity.
