The critical role of rigorous due diligence for real world asset tokenisation

In the dynamic and rapidly evolving world of finance, the advent of tokenisation stands as a revolutionary step in the realm of traditional finance (TradFi), as evangelised by companies such as BlackRock, Citi Group, McKinsey, Apollo and many more. This innovative process, which involves converting rights to an asset into a digital token on a blockchain, is not just a technological advancement; it's a paradigm shift, offering unprecedented opportunities for liquidity, accessibility and transparency.

Tokenisation and Private Credit

With great innovation comes great responsibility, especially in the industry of private credit securitisation. The journey of many tokenisation pioneers in the private credit space serves as a testament to the critical importance of rigorous due diligence on the originators (platforms issuing the loans) and underlying assets (the quality of the loans themselves).

Such tokenisation platforms, at the forefront of blending traditional finance with the digital age, have encountered significant hurdles due to (among other factors) lapses in due diligence, resulting in defaults that send ripples across the traditional financial and decentralised finance (DeFi) ecosystems alike. Their experiences offer invaluable insights into the complexities and challenges of ensuring the integrity and sustainability of tokenised assets.

Since 2020, there have been over $74 million in defaults across 5 of the 9 major private credit tokenisation platforms, according to rwa.xyz. Whilst it would be wrong to assume that all of the above defaults are attributed to lapses alone, it is fair to acknowledge the importance of due diligence as a mechanism to dramatically reduce the risks associated to such defaults in the future. An approach that is absolutely necessary to translate from the traditional finance world to the future of DeFi.

The graphic below indicates default rates in accordance with total origination amount and total deal count. Platforms 4, 5 and 6 have the most consistent default rates across the two metrics and represent consumer loans, invoice receivables, real estate, SME loans, salary advances, revenue-based finance, BNPL and crypto trading loans. The default rates of these 3 platforms fall within the general default rates for TradFi SME and consumer loans for European assets in ideal market conditions over the same period (2-5%). Meaning, since 2020 there has been little difference between TradFi and DeFi private credit platforms, with regard to default rates.

Figure 1: Private Credit Tokenisation Platform Default Rates since 2020. Source: rwa.xyz

Fasanara, who recently announced their involvement in tokenisation projects with Sygnum Bank and Untangled Finance, are looking to bring their experience in rigorous and holistic due diligence in traditional finance to the tokenisation and DeFi ecosystems. As a regulated financial player with a long-standing track record, Fasanara exemplifies the importance of meticulous due diligence in the private credit sector, having assessed over 450 fintech lenders around the globe and integrating around 140 of these into its proprietary technology platform.

Fasanara’s approach underscores the necessity of robust risk mitigation strategies, which are vital in safeguarding investments and maintaining the delicate balance between innovation and investor protection. At the same time, this approach opens the door to debate on the optimal level of decentralisation: should due diligence be part of the DeFi stack, or should it be delegated to experienced parties? How to reconcile the presence of an independent organization in the middle of a decentralised transaction? And what will be the winning model in the future, a hybrid DeFi – CeFi or a purely decentralised approach?

The result of employing a stringent, structured and comprehensive approach to due diligence is that Fasanara ends up funding lenders who take a prudent, scalable approach to lending, which in turn allows them to deliver stable returns to their investors across a multi-billion dollar portfolio.

Figure 2: Fasanara's Due Diligence Approach. Source: Fasanara Credit Intelligence

Thus, Fasanara through cherry-picking, active management and such due diligence is able to dramatically reduce their default rates across its SME and consumer loan funds.

The unfolding narrative of real-world asset tokenisation in the private credit sector underscores a fundamental truth: innovation must be anchored in the bedrock of rigorous due diligence. The experiences of tokenisation platforms since their respective inceptions, punctuated by the defaults totalling over $74 million on a total of $4.3 billion worth of assets deployed, serve as a clarion call for the industry.

As Fasanara moves forward, the lesson is clear: the viability of tokenisation in transforming private credit securitisation hinges on a balance of innovation with meticulous, informed and disciplined due diligence. This balance will be the key to unlocking the full potential of tokenisation, fostering a future where financial innovation and investor protection go hand in hand, leading to a more accessible, transparent and robust financial ecosystem.

---

Disclaimer

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell, or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investors or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with their financial professionals. The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance does not predict or guarantee future results. Investing involves risk; principal loss is possible. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Important information on risk

Investing involves risk. The value of any investment and the income from such can go down as well as up, and you may not get back the full amount invested. Past performance is not a guarantee of future returns. Changes in the rate of exchange may also cause the value of overseas investments to go up or down. This information represents the views of Fasanara Capital Ltd and its investment specialists. It is not intended to be a forecast of future events and/or guarantee of any future result. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. There is no assurance that an investment will provide positive performance over any period of time. This information does not constitute investment research as defined under MiFID.