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Tokenisation — the process of leveraging the transparency benefits of blockchain to create digital tokens that represent real-world assets — is gaining significant momentum. With McKinsey forecasting that it could become a $3.8 trillion market by 2030 (under the most optimistic adoption scenario), banking behemoths, including Blackrock, UBS and Goldman Sachs, are rushing to capture a slice of this growth.

There’s fevered excitement in the financial world around how tokenisation can streamline operations, reduce costs and open up new revenue streams. But the major capital market players shouldn’t be the only ones to leverage these benefits. The microfinance sector — and therefore a plethora of small and medium enterprises (SMEs) across low- and middle-income countries (LMICs) — also have a lot to gain from the tokenisation wave.

Tokenisation is slowly making inroads into the world of microfinance. At Mikro Kapital, we launched the market’s first tokenised bonds for microcredit in 2023, via Bitfinex Securities, a regulated platform that enables entities to raise capital through the listing of tokenised securities. We raised over $5.2 million in Tether, the world’s largest stablecoin, a type of cryptocurrency pegged to the US dollar. Since then, we issued three more tokenised bonds before launching a regular programme of issuances in 2024. These bonds helped to raise proceeds that Mikro Kapital has invested in microfinance institutions (MFIs) that provide fiat currency microloans to SMEs in LMICs, including in Central Asia.

While we have made great strides in leveraging tokenisation to raise capital to invest in the microfinance sector, we are one small part of a much larger ecosystem of investors and MFIs. We believe that if more microfinance firms were able to tap into the benefits of raising capital via tokenisation, we could collectively have a much greater impact on LMIC entrepreneurs. 

Unlocking microfinance capital through tokenisation

This innovation, and the streamlining of capital raising that it enables, is sorely needed in a world where at least 1.4 billion people — equivalent to approximately double the population of Europe — are unbanked. This lack of access to traditional banking services also extends to small businesses: Being locked out of capital raising is having detrimental effects not only on individual SMEs, but also on the economic output of LMICs looking to improve their fortunes.

In addition to boosting microcapital fund raising, there are wider positive impacts that crypto-fuelled financial innovation is having in emerging markets — it’s no coincidence that 60% of the top five countries for crypto adoption are LMICs. Blockchain-backed financial services — particularly stablecoins — have provided an escape route for some entrepreneurs in these markets, who had previously been trapped in a financial world that wasn’t made for them. Financial services have traditionally only been available through established banks and other brick-and-mortar institutions. Since SMEs don’t always have the collateral, credit history or other requirements these institutions request, some have turned to stablecoin borrowing, for example, as an alternative.

But while this has proven to be an invaluable lifeline for some LMIC entrepreneurs, not everyone is aware that this is an option, and many may not feel they have sufficient knowledge to borrow in crypto. Solo entrepreneurs and SMEs all over the world should be able to access small loans to grow their businesses in fiat currencies if they so wish, which is why microfinancing is still vital.

Tokenisation offers a key benefit to microfinance institutions that serve these markets: efficiency. A central tenet of tokenisation is disintermediation — the removal of traditional middlemen, including the numerous banking partners needed to facilitate traditional capital markets transactions. Blockchain technology helps us to bypass these middlemen by being self-executing within defined parameters. For example, interest payments on tokenised bonds issued by Mikro Kapital are sent to investors automatically via smart contracts once they have reached maturity.

Ultimately, tokenisation reduces distances between people: By leveraging it, investment funds like Mikro Kapital can now raise precisely what is needed, when it is needed. This agile approach ensures that investors’ money is put to work more quickly and efficiently in supporting entrepreneurs in developing economies.

How microfinance companies can leverage tokenisation

As a pioneer in the use of tokenisation in microfinance capital raising, we saw an opportunity to capitalise on the first-mover advantage — but we had some initial reservations about how we could approach this in practice. We understood that tokenisation could enable us to serve MFIs and their SME borrowers in new ways, but we were unsure about how to tap into this technology in a way that met regulatory requirements.

As with any frontier technology, taking the first steps felt like a voyage into the unknown. Our team worked with Bitfinex Securities, which guided us through the process of becoming an approved issuer of tokenised bonds and allayed any concerns we had in adopting this new approach.

In terms of regulation, Bitfinex Securities is registered in two forward-thinking digital assets jurisdictions — El Salvador and the Astana International Financial Centre (AIFC), a pioneering financial hub in Kazakhstan based on English Common Law. But equally as important as the licences Bitfinex Securities holds is its underlying blockchain technology.

Bitfinex uses the Liquid Network — a Bitcoin side-chain — for most issuances on the Bitfinex Securities platform. In the crypto world, side-chains are separate blockchain networks that connect to a parent blockchain (Bitcoin in this case) to enhance its scalability and interoperability. Liquid is purpose-built for the issuance of tokenised assets, since it has built-in features that prevent its use in money laundering and allow us to comply with Know-Your-Customer regulations, while still giving investors the benefits of interacting with the digital asset world. Liquid also has the benefit of being part of the Bitcoin ecosystem, which has much greater regulatory clarity globally than other tokenisation ecosystems — including Ethereum, the blockchain used by many other tokenisation platforms.

In addition to advising us to use the Liquid Network, the most robust technological solution from a security and regulatory perspective in their view, Bitfinex Securities undertook a vetting process to ensure that we met all the requirements of regulators. All tokenised asset issuers in El Salvador and the AIFC must have an independent board, independent auditors and a code of conduct applicable to all company personnel. In addition, each issuance on Bitfinex Securities must have commercial viability, before they are eventually approved by the regulatory authorities in these jurisdictions.

Despite these rigorous due diligence processes, we were approved quite quickly. It generally takes 20-30 days for an issuer to be approved for tokenised issuances on Bitfinex Securities, compared to several months to complete the regulatory processes for traditional banking processes.

Once we received regulatory approval, we launched our first tokenised bond via ALTERNATIVE, Mikro Kapital’s securitisation fund, which now issues both traditional bonds and tokenised bonds. The proceeds are invested in our portfolio companies that issue microloans to entrepreneurs who have no access to banking credit services. By adding tokenisation issuances to our existing programme of traditional bond issuances, we can now help MFIs serve small businesses and entrepreneurs with unprecedented speed and efficiency. For us, this has a dual impact: It allows us to promote financial inclusion in the countries where we operate, while also serving our digital-native investors more effectively. We’re starting to see the first signs of a generational shift among our investor base, with our investors now demanding more digital-first thinking. Tokenised issuances therefore provide a win-win situation, supporting sustainable grassroots economic growth while also aligning with the expectations of increasingly tech-driven investors.

Our experience has shown that it is possible for a company to adopt tokenisation, and that this approach offers a distinct advantage in a world that’s becoming increasingly digital. 

Real-world impacts of tokenisation in microfinance

Our ALTERNATIVE securitisation fund, which pools capital raised from both tokenised and traditional issuances, has reached over 180,000 recipients in 10 countries so far, with a total portfolio value of approximately €360 million. The majority of issued credits — 60% — support agribusiness entrepreneurs, a critical sector for economic stability in LMICs. We have also allocated additional funding across other key industries including wholesale and retail, construction, education, healthcare, and manufacturing.

By combining innovative tokenised solutions with traditional financial instruments, we are enabling MFIs to reach more borrowers who have been excluded from access to traditional bank loans, enabling them to invest in building successful businesses. This not only drives economic empowerment for individuals, it also enables entrepreneurs to thrive in sectors that are critical to local economies.

As our success in leveraging this model has shown, tokenisation isn’t solely the domain of large banking institutions; it has potential for smaller, impact-driven microfinance businesses as well. By adopting this technology, Mikro Kapital has demonstrated how MFIs’ funders can be more agile in sourcing capital, by tapping into a large pool of global investors eager to support meaningful, community-focused initiatives through microfinance, while bypassing traditional inefficiencies in the process.

Blockchain technology is here to stay in our sector. Through the Mikro Kapital and Bitfinex Securities partnership, we are proud to lead the way in integrating this technology into our work to boost our financial and social impact, proving that innovation and purpose can go hand in hand.

Michele Mattioda is a Director at Mikro Kapital.

Photo credit: Yan Krukau