The World Bank has published a report exploring blockchain for infrastructure projects such as roads, power plants and renewable energy projects. The authors aim to help the World Bank decide whether to conduct a proof of concept tokenized security to test the waters.
Tokenization to help the infrastructure funding gap
The Global Infrastructure Hub estimates a $15 trillion finance gap for infrastructure projects between 2018 and 2040. Around $3-$4 trillion is spent annually on infrastructure, with governments covering most of it. In 2019 private investment in infrastructure through primary issuances amounted to just $106 billion. With COVID stretching government budgets, there’s a desire to tap more private sources of finance.
However, many public infrastructure projects have minimum investment sizes of $1 million, making them only accessible to institutions or ultra high net worth individuals.
Blockchain can potentially help with infrastructure projects in two very different ways. One is to help with the funding gap by tokenizing infrastructure securities, either debt or equity. Using blockchain might reduce the costs of issuances, although a special purpose vehicle will still be required. It could possibly democratize access by making it more accessible to a wider range of investors.
A second application is to use blockchain’s transparency for infrastructure project management at the budgetary level. This involves sharing the data around purchase orders and invoicing between subcontractors and contractors to reduce the potential for disputes.
Democratizing access with blockchain tokenization
Most of the report focuses on the potential for blockchain applied to finance. It finds significant challenges, particularly on the regulatory front.
That’s partly because only a few jurisdictions have clarified the treatment of tokenized securities. And even in these cases, the requirement for access to be restricted to accredited investors for certain types of securities is invariably unchanged.
While the paper focuses on tokenized securities rather than crypto, it targets the crypto community, focusing on public blockchain and distribution via DeFi and crypto exchanges.
However, few crypto exchanges are licensed to handle securities. Even if it’s tricky to target retail investors, lowering the minimum investment could vastly expand the investor base, even for accredited investors who might access it via regulated venues. Public blockchain is viewed as a better avenue for fractionalization.
The paper does not address the adoption of tokenization by the incumbent regulated sector. It mentions the World Bank’s blockchain bond, which was groundbreaking at the time and used a permissioned blockchain.
“Tokenization cannot deliver on many of its value propositions when it is fully compliant with relevant financial regulations, at least at the time of writing this report,” write the authors.
Nonetheless, it suggests the World Bank should consider launching a proof of concept to help to drive change in financial regulation and demonstrate leadership in blockchain technology. Additionally, it would gain experience in interacting with the ‘crypto ecosystem’.