General, Risk Mangement, Tokenization

Private Credit: The Emerging Trend of 2025

January 12, 2025

At Particula, we view private credit as the next major frontier in the digital asset space, following the successful tokenization of funds and bonds. Real-world assets (RWAs), excluding stablecoins, now account for 15% of total on-chain value locked (TVL), having expanded by over 60% in 2024 to reach $13.7 billion. Notably, private credit constitutes approximately 70% of the RWA market, surpassing other categories such as Treasury bills and commodities. The rapid evolution of this sector is driven by a growing appetite for higher-yield opportunities and advancements in tokenization infrastructure. Industry leaders like Figure have significantly contributed to this growth, facilitating nearly $4 billion in tokenized private credit in 2024 alone.

Traditionally dominated by institutional investors and specialized funds, private credit has been a cornerstone of global finance. Despite its growth and resilience, the market faces persistent challenges, including illiquidity, high transaction costs, and restricted accessibility. Tokenization emerges as a potential solution, poised to transform how private credit is structured, traded, and accessed. 
This article kicks off a three-part series exploring the private credit market, its challenges, and whether tokenization could be the answer.

Private Credit Tokenization

What is Private Credit?

Private credit refers to debt investments that are not issued or traded on public markets. These include direct lending, mezzanine debt, distressed debt, and other bespoke financing arrangements. Over the past 15 years, private credit has emerged as one of the fastest-growing segments of the financial system, reaching nearly $2 trillion by the end of 2023—a tenfold increase since 2009 (McKinsey, 2024). This surge is driven by growing demand for alternative financing solutions as traditional banking faces regulatory constraints and risk aversion.

Key Characteristics of Private Credit:

  • Tailored Financing: Custom agreements designed to meet borrower needs.
  • Higher Yields: Returns typically exceed those of public debt due to greater risk and complexity.
  • Illiquidity: Investors often commit capital for extended periods with limited secondary market options.
  • Opaqueness: Transactions often lack standardized terms, increasing difficulty in market valuation.

While these characteristics make private credit attractive, they also present inefficiencies that introduce systemic risks and opportunities for technological disruption.

One of the primary challenges is illiquidity, as private credit investments typically involve long investment horizons that limit investor flexibility. Unlike public markets, where assets can be traded relatively quickly, private credit instruments often require investors to commit their capital for extended periods, reducing their ability to react to changing market conditions.

High costs also present a significant barrier, driven by the reliance on multiple intermediaries such as custodians and administrators. These middlemen add layers of complexity and expense to transactions, ultimately diminishing overall returns and making private credit less accessible to a broader investor base.

Another critical issue is the lack of transparency inherent in private credit markets. The complex structures of private credit deals, coupled with limited reporting standards, create significant information asymmetries. Investors often struggle to obtain a clear view of underlying risks, making informed decision-making more challenging.

Moreover, restricted access remains a persistent obstacle, with institutional investors dominating the space. Retail investors and smaller institutions are often excluded from participating due to high entry barriers and regulatory requirements, preventing broader market democratization.

Lastly, the systemic risk posed by the interconnected nature of private credit and equity markets cannot be overlooked. During periods of financial stress, disruptions in one sector can have cascading effects, potentially amplifying market instability and exposing investors to unforeseen vulnerabilities.

Figure 1 Private Credit Structure

What is Tokenization?

Tokenization is the process of converting rights to an asset into a digital token on a blockchain. These tokens can represent ownership, entitlements, or economic benefits, enabling fractional ownership and streamlined trading. In the context of private credit, tokenization translates complex debt instruments into programmable digital assets.

Key Features of Tokenized Assets:

  • Fractional Ownership: Investors can own portions of a credit instrument, lowering entry barriers.
  • Transparency: Blockchain’s immutable ledger ensures accessible transaction histories.
  • Efficiency: Smart contracts automate processes such as interest payments and compliance checks.
  • Global Accessibility: Digital platforms connect a broader, more diverse investor base.
Figure 2 Tokenization Process

How Tokenization Addresses Private Credit Challenges

    1. Enhancing Liquidity:
      • Tokenized credit instruments can be traded on digital asset marketplaces, enabling secondary market liquidity.
      • Blockchain can introduce a more dynamic trading ecosystem with the potential for continuous price discovery ([Chen et al., 2021, “Journal of Financial Economics”]).
    2. Reducing Costs:
      • Smart contracts automate payment schedules and compliance, reducing administrative overhead.
      • Efficiencies lower costs for both issuers and investors ([Meyer et al., 2022, “European Financial Review”]).
    3. Increasing Accessibility:
      • Fractionalization allows broader participation, including retail investors, democratizing access to private credit opportunities.
    4. Improving Transparency:
      • Blockchain’s open ledger ensures stakeholders have real-time visibility into asset performance and terms.
      • Enhanced reporting offers insights previously unavailable (Academic Blockchain Consortium, 2023).
    5. Addressing Systemic Concerns:
      • Real-time performance tracking addresses stale valuations and enhances risk assessments.

Limitations of Tokenization in Private Credit
While promising, tokenization is not a panacea. It faces several critical challenges:

  1. Regulatory Uncertainty:
    • Jurisdictional differences in blockchain and token regulations create a fragmented compliance landscape, complicating adoption (FINRA, 2022).
  2. Market Fragmentation:
    • The proliferation of tokenization platforms without interoperability standards can lead to inefficiencies and siloed liquidity pools.
  3. Technology Risks:
    • Smart contract vulnerabilities and reliance on blockchain infrastructure pose operational and security risks ([Katsiampa et al., 2022, “Journal of Digital Asset Management”]).
  4. Limited Secondary Market Adoption:
    • While tokenization enhances the potential for liquidity, actual trading volumes remain limited due to lack of market depth and investor familiarity.
  5. Valuation and Reporting Standards:
    • The absence of universally accepted valuation and reporting frameworks for tokenized assets can create ambiguity and hinder investor confidence.
  6. Privacy Concerns:
    • Blockchain’s transparency, while beneficial for accountability, may conflict with confidentiality requirements in private credit transactions.

Looking Ahead

Tokenization has the potential to transform the private credit market by addressing core inefficiencies. However, realizing its full potential requires overcoming significant hurdles, including regulatory alignment, technology adoption, and standardization. Stakeholders must collaborate to establish a robust framework that balances innovation with risk management.

Future articles in this series will explore the mechanics and challenges of tokenizing private credit and analyze its broader implications for financial markets.

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Sources:

  1. Bain & Company (2023).: “Private Debt Market Trends.”

  2. Chen, H., et al. (2021). “Blockchain’s Role in Financial Liquidity.” Journal of Financial Economics.

  3. Meyer, J., et al. (2022). “Efficiency Gains in Tokenized Markets.” European Financial Review.

  4. Academic Blockchain Consortium (2023). “Blockchain and Asset Tokenization.”

  5. FINRA (2022). “Regulatory Challenges in Digital Assets.”

  6. Katsiampa, P., et al. (2022). “Risks in Digital Asset Management.” Journal of Digital Asset Management.

  7. Deloitte Insights (2023). “Tokenization and Financial Innovation.”

  8. OECD (2023). “Digital Finance: Opportunities and Risks.”

  9. IMF (2022). “Emerging Trends in Asset Tokenization.”

  10. World Economic Forum (2023). “Building a Tokenized Financial Ecosystem.”

  11. McKinsey & Company (2024). “The next era of private credit.”

  12. S&P Global (2024). “Tokenized Private Credit: A New Digital Frontier for Real World Assets”

Learn More About Particula

At Particula, we have developed the first rating and analytics platform for tokenized assets. Our goal is to provide the next generation of ratings for the next generation of assets in order to give investors instant security, clarity and better market access.

To learn more or gain access to our platform, please contact us at info@particula.io

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