Does blockchain have a role in the financing of infrastructure?
The purpose of this report is to assess whether digitizing the equity or debt financing used for infrastructure projects using blockchain (i.e., tokenized infrastructure) provides enough benefits to justify the use of this technology. The information presented here aims to inform the World Bank whether it should explore the possibility of tokenizing one of its infrastructure projects. The conclusions are based on interviews with tokenization start-ups, expert opinions, and a review of current and planned regulatory frameworks in selected jurisdictions and use cases/pilots to date.
It is important to make the distinction between crypto as an asset class and tokenized securities. In the case of the latter blockchain only serves as a digital vehicle or technological enabler. A tokenized equity or tokenized debt have similar financial characteristics and are regulated the same way as their traditional "off-chain" equivalents.
Regulation, or rather the lack of regulation designed for tokenized securities, is the main barrier of using blockchain for the financing of infrastructure. While there has been some notable progress in a few countries, there is still a lot of work to be done on the regulatory front before the full potential of tokenized securities can be realized.
It might prove to be difficult for tokenization to deliver on its value proposition to democratize finance. While tokenization can decrease the minimum size of infrastructure investments significantly, many of the infrastructure tokenization projects to date were only accessible for accredited investors due to securities regulation.
Infrastructure investment is a means to generate long-term benefits to society with inclusive economic growth and well-being while contributing to a low-carbon transition. However, the sector is faced with several challenges, including poor governance and management of infrastructure systems. Projects are also often large, capital intensive, and not immediately profitable. Therefore, innovative mechanisms are required to leverage private financing and lower the costs of capital. It is also crucial to maintain information symmetry among stakeholders and provide investors with transparent data to make informed investment decisions. One of the foremost impediments is matching the abundant supply of private capital to the demand for infrastructure.
The use of distributed ledger technologies (DLT) like blockchain can potentially overcome many of the challenges that hinder the scaling of infrastructure. The efficiency of financing and management of infrastructure projects can improve by leveraging core features of the technology like decentralization, immutability, and transparency. Blockchain is an immutable technological infrastructure designed to enable simultaneous access, validation, and record updating spread across several networks. These features make blockchain a disruptive technology capable of transforming businesses. The most common application of this technology in finance could be capital-raising through Security Token Offerings (STOs) and post-trade processes, like clearing and settlement of securities.
Another application of blockchain technology is the tokenization of real assets. Tokenization is the process of converting rights, a unit of asset ownership, debt, or even a physical asset into a digital token on a blockchain. This enables historically illiquid assets to be broken down into smaller units representing ownership and encouraging the democratization of finance.
The potential advantages of tokenizing “real-world” assets include efficiency gains driven by automation and disintermediation, transparency, and greater liquidity and tradability of illiquid assets. The tokenization of assets can democratize the ownership of certain assets as a wider range of investors have access. As opposed to blockchain native tokens, like bitcoin, that only have value on the blockchain, real-world assets have an underlying value off-chain as well, backed by the real assets existing outside the ledger. The most prominent use of tokenization of real-world assets is securities (bonds and stocks), commodities (like gold), and non-financial assets (like real estate).
The tokenization of infrastructure claims to address three objectives: financing initiatives, democratizing infrastructure, and increasing the efficiency of infrastructure management. These objectives are interconnected and enabled through the core features of blockchain technology—decentralization, immutability, and transparency. The data derived from infrastructure use and performance results can uncover operational inefficiencies and unlock new revenue streams for third-party planning on building new services and capital appreciation opportunities.
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