Often described as a solution looking for a problem, blockchain technology is generating a new wave of excitement in the shape of real-world asset tokenisation. Could this blurring of the line between the physical and the virtual have an application in commodity trade? Eleanor Wragg reports.
If the hype is to be believed, blockchain tokens – pieces of code that represent rights or assets, and can be used, owned and transferred without the need for a third-party intermediary – are set to bring forth an entirely new economic paradigm. If realised, this shift promises to redefine traditional notions of ownership, investment and trust by leveraging the inherent security of distributed ledger technology to empower individuals and transform industries.
Tokens are already revolutionising the financial services sector. Approximately US$120bn of stablecoins, which are tokens pegged to physical currency, are currently in circulation. 130 countries, representing 98% of the global economy, are developing central bank digital currencies (CBDCs) or digital representations of a nation’s fiat currency.
Increasingly, though, the tokenisation trend is moving beyond money to a broader range of so-called real-world assets – which can be literally anything of economic value, from financial instruments like stocks and bonds to physical goods such as oil or works of art.
In what it calls a “conservative estimate”, international management consultancy firm Roland Berger says the tokenised real-world asset market will be worth at least US$10tn by 2030, up from a current value of US$300bn. A report produced by Boston Consulting Group and Asian investment platform ADDX is more optimistic still, putting the figure at an eye-watering US$16tn – slightly less than the current GDP of China.
Sowing digital seeds of change
Digital assets are already being used to firm up the financial underpinnings of goods trade, with use cases including the tokenisation of trade documents, such as invoices, to unlock cheaper capital for small and medium-sized sellers that traditionally struggle to access finance.
But going beyond the financial supply chain to tokenise the underlying goods themselves could, in theory, represent an even more transformative application of blockchain technology.
Assigning each physical commodity, from agricultural products to minerals and metals, a unique digital twin in the form of a token on the blockchain could allow stakeholders in the ecosystem to interact with the same digital representation of the asset, facilitating new forms of collaboration.
For cash-strapped producers and small-scale farmers who face limited access to finance, for example, turning their goods into tokens could provide new avenues for securing funds, as well as allow them to bypass intermediaries and sell directly to buyers for a fair price.
In Latin America, the world’s largest agricultural commodities exporting region, this concept has already begun to gain traction.
The Agrotoken platform, established in Buenos Aires in 2020, transforms soy, corn and wheat grown in Argentina and Brazil into virtual tokens, each of which represents a tonne of physical grain stored by a farmer in a warehouse. This large-scale project has won the backing of payments giant Visa, which has introduced a prepaid debit card that enables farmers to make purchases using their token balance. In addition, through tie-ups with both global bank Santander and local financier Banco Galicia, farmers can also use their tokens as collateral to help them access loans and credit facilities.
In 2021, Brazilian coffee co-operative Minasul, which comprises 6,000 coffee producers from over 150 locations, launched the Coffee Coin, a stablecoin representing one kilogram of green coffee beans that can be traded on crypto exchanges.
Coffee growers usually only get paid once they sell their beans after harvest and often have limited access to formal financial services. As a result, many struggle to buy the inputs they need throughout the year to make their production viable.
Developed as part of a larger digitalisation project aimed at enabling farmers to sell produce via their mobile telephones, the Coffee Coin initiative allows coffee growers to convert their current and future coffee production into virtual tokens. These can then be exchanged for items such as pesticides, tools, fertiliser and machinery on Minasul’s digital marketplace – providing a cost-effective way for smallholders to use their coffee as collateral for financing from the co-operative.
The tokens also represent an opportunity for the co-operative to attract investment from the crypto community. Speaking to the Brazilian media at the launch of the coin, Luis Henrique Albinati, new business director at Minasul, said: “Coffee Coin has a trade minimum that will always be equal to the coffee prices on the market. On the other hand, it has no maximums, so it can reach high levels on the secondary market, where people trade one cryptocurrency for another.”
Replicating these models across the wider commodities space to tap into global crypto liquidity could go some way towards meeting an ever-growing need in the trade finance market. According to research released last year by McKinsey, as much as US$500bn of additional credit could be required to support commodity flows amid bank de-risking, fluctuations in the prices of raw materials, shipping delays, rising interest rates and underlying inflationary pressures.
However, the belief that there are untapped riches circulating around crypto exchanges able to flood into trade finance and plug its many gaps is not one that is universally held.
“The normal institutional capital, be that pension funds, insurers or hedge funds – that’s our world, those are the people we know. The reason we explored [the tokenisation of physical commodities] is we’re told that there’s this whole pool of DeFi capital coming from crypto wealth,” an industry source with extensive experience in the alternative commodity finance space tells GTR. “The reality is, the moment it came up the scale, if it wasn’t from ill-gotten means, the liquidity there was the same institutional capital seeking the same type of returns.”
Connecting the physical to the virtual
Unlike assets such as bitcoin, which represent a unit of value, or financial contracts, which by nature are digital and mathematical, physical objects cannot live out their entire existence on-chain. For real-world items to be successfully tokenised at scale, therefore, a robust and transparent linkage must be created between them and their digital doppelgangers.
“Tokenisation would allow for increased liquidity, the development of entirely new products, increased transparency and cost reduction,” David Sutter, CEO of decentralised finance platform OpenTrade, tells GTR. “But it all depends on having one or more trusted token issuers that attest to the quality and presence of the underlying physical commodity.”
Achieving this means bringing in external sources of data that are considered to be authoritative, trusted and definitive – known in Web3 parlance as “oracles”.
In the case of Agrotoken and Coffee Coin, these oracles are warehouse receipts that certify the existence of agricultural commodities by the producer.
Other oracle systems include Dubai Multi Commodities Centre (DMCC) Tradeflow, a registry that tracks the possession and ownership of commodities stored in UAE-based facilities, including gold and jewellery. It issues negotiable electronic title documents called DMCC Tradeflow Warrants that can be electronically transferred between users on a web-based interface.
However, not all physically traded commodities are stored in warehouses – and even those that are often spend only a short amount of time in them before being shipped along the supply chain to their end buyer. As such, other ways must be found to maintain an unbroken link between on-chain tokens and off-chain goods.
For many commodities, the technology to do this already exists. In agrifood, for example, electronic tags containing a microchip and antenna can be attached to livestock, enabling a particular animal’s whereabouts to be verified at all times, while DNA analysis can be used to track meat products through the supply chain.
An even more high-tech solution is being developed by Security Matters (SMX), a company focused on the digitisation of physical objects on the blockchain. It has created what it calls “unalterable chemical-based barcodes” which allow users to permanently mark any object, whether solid, liquid or gas, to enable identification, proof of authenticity and traceability.
In a 2022 trial with tyre manufacturer Continental, SMX’s marker was added to responsibly sourced latex during harvesting. It withstood both the intensive preparations involved in the production of natural rubber as well as the tyre manufacturing process itself, enabling Continental to prove compliance with sustainability standards throughout its end-to-end supply chain.
But although they might be technically feasible, the cost and complexity of these solutions could outweigh any benefits tokenisation could bring.
“I think it’s really important to question the viability of these projects and if we really need them. Like, is this going to be the best use case? Is this going to make sense?” Chaim Finizola, co-founder of decentralised credit marketplace Credix, tells GTR.
The onward march on-chain
In September 2023, Credix, along with seven other big names in the DeFi space, founded the Tokenized Asset Coalition, the stated aim of which is to unite traditional and crypto financial systems with the shared belief that many assets will eventually move on-chain.
“Our emphasis is on creating an educational and best practice framework for real-world assets, with a focus on the institutional side. It’s about how we bring large funds and asset managers into the space to understand the added value of the tokenisation: the efficiency, the transparency and the democratisation,” Finizola says.
“We’re moving towards a phase where we’re starting to see real adoption. What I believe will drive a lot of innovation in this space are regulators’ and central banks’ policies regarding tokenisation,” he adds, pointing to Brazil’s CBDC initiative, Drex, as an example. The digital form of the Brazilian real is expected to launch in the second half of 2024, and is designed as a platform upon which transactions from the physical world – such as real estate purchases – can be carried out via smart contracts on the blockchain.
“The direction of travel is that the entire capital market infrastructure from a securitisation perspective will be pushed onto this system, and it’s not going to be an option because all banks have to use it,” he tells GTR. “Because of the make-up of Brazil’s economy, this will also drive to some degree commodities to be pushed onto, traded on and represented on the Drex platform. It’s just not clear how yet, but progress is coming earlier than expected and might drive some initiatives of which we are unaware today.”
While CBDC projects are boosting global awareness of tokenisation as a concept, central banks aren’t the only ones making moves in the space. A growing number of global banks are adding digital asset capabilities – notably HSBC, which in November unveiled a tokenised physical gold offering that generates a permissioned digital representation of the gold it holds on behalf of clients in its London vault.
Putting feasibility issues to one side, the tokenisation of physical commodities could theoretically bring numerous benefits, from proving the origin of goods for sanctions or customs purposes to facilitating ESG compliance and unlocking new financing possibilities. As the technology continues to develop, it could significantly reshape how commodities are traded globally, making the market more accessible, transparent and efficient.
For now, the concept of tokenising the vast array of commodities that are shipped from buyer to seller around the world each day remains both largely hypothetical and of uncertain practicality. But as activity ramps up across the digital asset space, a future where physical goods and their virtual replicas coexist seamlessly may not be beyond the realms of possibility.
