Recently, the World Bank published a report named “Infrastructure Tokenization” highlighting the role of blockchain in financing infrastructure. The report discussed the financing of infrastructure using blockchain technology, scaling of infrastructure and Tokenization of assets. The report further discussed the risk associated and regulatory frameworks across the globe.
The report mentions 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. The 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 in post-trade processes, like clearing and settlement of securities.
It further pointed out that the tokenization of infrastructure is claimed 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 as well as unlock new revenue streams for third-party planning on building new services and capital appreciation opportunities.
The published paper propounded the use of smart contracts in infrastructure projects and can improve the transparency of the process by verifying invoices and linking them to master data in a real-time blockchain database. The report proposes a three-way match of the invoice for implementation including the Purchase order, certified progress and the master data.
It highlighted that smart contracts enable the programming and auto-execution of various operating scenarios to transparently verify invoices as per the terms of the contract. This increases transparency in contract administration and reduces the need for a full-time contract administrator.
Despite the potential advantages associated with infrastructure tokenization, the process is legally and
technically complicated, which is hindering the adoption of blockchain technology. While in traditional securities each asset type is subject to local regulations, tokenization enables automated compliance with the tokens being traded. This can raise new concerns such as overuse of computational infrastructure, speculative arbitrage because of unclear regulatory frameworks for issuance and compliance enforcement, and community participation in overcoming potential privacy infringement issues. The issues are tokenizing different security types, lack of legal clarity and governance risks, the legal status of digital tokens and cyber security concerns.
Countries with a strong legal framework for DLT-based securities present an attractive destination for issuing these security tokens and participating in the token economy. In the United States, as an emerging technological solution, the tokenization of infrastructure is subject to different laws at the federal and state levels. Similarly, as a part of the EU Digital Finance Package in 2020, the European Commission published the draft Regulation for Markets in Crypto Assets (MiCA) to foster innovation and competition in digital finance while controlling associated risks.
Tokenization in developing countries can elevate private sector confidence by improving infrastructure
asset liquidity while opening access to small-scale projects and enlarging participation in infrastructure
development. Emerging markets and developing economies (EMDE) governments can benefit from prospective administrative and financial efficiencies brought about by automated auditing, enhanced project monitoring, and lower financing costs. Small-scale projects often deliver the most economic and social impact per dollar spent.