Tokenization in Private Credit: Why It Matters

Summary

• Private credit is growing, but access and management remain outdated.
• Tokenization opens the market to more investors through fractional ownership.
• Smart contracts automate interest payments, cap tables, and compliance.
• Institutions can offer private credit to new categories of clients.
• This is a legal, regulated opportunity, not a crypto experiment.

The Problem with Private Credit Today

Private credit has become a key alternative asset class. Yet the way it is structured and managed remains manual, exclusive, and inflexible.

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Investors face high minimums and slow onboarding. Fund managers and institutions often avoid this asset class due to operational complexity.

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However, tokenization can help solve these problems through digitization and automation. This allows issuers to reach a broader investor base, lower costs, and create scalable products.

What Is Tokenization in Private Credit?

Tokenization creates a digital representation of a real-world asset. In private credit, each token can represent underlying assets that contain rights of revenue streams, interest, or dividends. These digital assets that can be issued, managed, and transferred more efficiently, while maintaining full regulatory compliance. 

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Common types of private credit products that can be tokenized: 

• Direct lending: Loans provided by institutions to small and mid-sized businesses (SMEs), often with flexible structures and higher yields than traditional bank loans.
• Revenue-based financing: A form of credit where repayments are tied to a company's revenue performance rather than fixed schedules. 
• Bridge loans: Short-term funding solutions used to cover liquidity needs between financing rounds or before an acquisition. 
• Mezzanine debt: Hybrid instruments that blend features of debt and equity, often used in leveraged buyouts. 
• Invoice financing: Advances made against unpaid invoices, often used by companies with working capital constraints. 
• Real estate-backed private loans: Secured private debt instruments issued against commercial or residential property assets.

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Use case example:

A €2 million loan to an early-stage tech company can be divided into 2,000 tokens of €1,000 each. Investors who purchase the tokens receive interest payments proportionally, based on the repayment schedule. 

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The tokens carry embedded legal rights and can be transferred only to verified investors, in line with the agreed terms.

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Expanding Market Reach Through Fractional Ownership

Traditionally, private credit deals involve large ticket sizes and private placements. Tokenization changes that.

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• One deal can be split into several digital units
• Each unit can be sold to qualified investors in different regions

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This allows institutions to offer private credit products to startups, SMEs, and other non-traditional clients. Investors benefit from lower minimums and greater access to diversified opportunities.

Automating Administration Through Smart Contracts

Managing private credit involves time-consuming tasks. These include reporting, interest distributions, document tracking, and cap table updates.

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Smart contracts can automate:

• Scheduled interest and principal distributions
• Real-time updates of investor holdings
• Compliance enforcement through transfer restrictions
• Audit trails for regulators and partners

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This reduces cost and risk for fund managers. It also improves accuracy and transparency for investor confidence.

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Platforms like Brickken provide the technology to third parties to manage the full lifecycle of digital assets, including dashboards, investor portals, and built-in KYC processes.

Introducing Liquidity to an Illiquid Asset Class

Private credit is usually a locked product with no exit until maturity. Tokenization introduces optional liquidity.

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Tokens can be traded between verified investors within compliant frameworks. Transfer conditions can include:

• Lock-up periods
• Geographic restrictions
• Investor qualification thresholds

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This provides flexibility for investors and enhances the appeal of the asset. Liquidity improves without sacrificing control or compliance.

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European regulations, such as the DLT Pilot Regime, provide a clear legal framework to support this type of secondary trading.

Keep the Same Legal Structure, Offer More Flexibility

Tokenization does not require new legal products. Existing legal structures can be applied to the digital sphere, including SPVs and standard loan agreements.

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The token becomes a digital layer on top of the legal asset. Through a digital asset is possible to enable:

• Custom tranches for senior or subordinated debt
• Specific conditions for redemption, transfer, and voting
• Whitelisting to control investor access

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All legal rights remain intact, and all regulatory requirements remain enforceable. The blockchain does not replace compliance. It simply executes it more efficiently.

This Is Not a Crypto Product

Tokenized private credit is not a speculative cryptocurrency. It is a regulated financial product that uses blockchain only as a means to improve delivery and operations.

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Tokenized instruments can, and should, be built in line with:

• MiFID II for securities
• National civil codes for loan agreements
• MiCA and the DLT Pilot Regime for digital infrastructure
• AML and KYC laws at the point of onboarding

A compliant tokenization should have Investors verified,transfers restricted, tokens are programmable, traceable, and auditable.

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This  makes it a legal, transparent, and auditable framework that builds trust with institutions, and all these is possible with the blockchain technology.

How Institutions Can Start

Many institutions begin with a pilot program. This allows legal, compliance, and product teams to test the model without overhauling existing systems.

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A typical pilot includes:

• One credit deal, issued through a compliant token
• Onboarding of a limited set of verified investors
• Observation of investor response and operational results

Pilots can be completed in a few weeks. Once successful, the model can scale across multiple asset classes.

Final Takeaway

Tokenization in private credit is a tool for institutions to:

• Reach new categories of clients
• Simplify deal administration
• Offer flexible structures with strong compliance
• Reduce cost and improve investor experience
• Unlock optional liquidity in a non-liquid market

This is not a technology for the future. It is ready today.

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Platforms like Brickken provide the technology with several tools to be a compliant infrastructure for financial institutions to tokenize, manage, and distribute real-world credit products securely.

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Are you interested in private credit tokenization? Book consultation with our experts.

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