Why Brazil is becoming an example of tokenization in the world

Suppose blockchain technology was the main responsible for creating Bitcoin (BTC) and other cryptocurrencies. In that case, it is increasingly necessary to understand that it is not necessarily linked to this market and that today it has been used to create several other solutions.

And today, one of the primary uses of blockchain is related to tokenization, a word that still scares many people but that seeks to open a whole vast universe of new investments, which may result in lower costs for both companies and investors.

If until the end of last year this was a little talked about topic, today tokenization is gaining strength, especially in Brazil. Currently, the Central Bank (BC) and the Securities and Exchange Commission (CVM) have a regulatory sandbox (experimentation environment) with projects involving tokens, putting Brazil in the spotlight in the segment.

“Brazil, with the CVM sandbox, is globally ahead in the tokenization theme; it is very advanced,” assesses Marcos Viriato, CEO of Parfin, in an interview with InfoMoney.

The idea of creating digital representations of financial assets is not something so recent, with projects that since 2018 have been trying a way to get off the paper but had no support from regulators. With the launch of the two sandboxes – CVM and BC – several companies were able to structure their platforms and are now starting to launch them officially.

“The regulator’s look is to protect the investor, so when you talk about tokenizing several assets, the control is a little more complicated because you are tokenizing an asset that shouldn’t necessarily be sold to that specific investor,” explains Viriato about the caution in launching these products.

Within these experimentation environments are four major projects involving tokenization, one of which is already in operation, conducted by Vórtx QR Tokenizadora, and three others that should be launched soon: BEE4, SMU, and OTC Exchange.

FROM DEBENTURES TO STOCK MARKET

At the beginning of tokenization in Brazil, we saw the idea of democratization of investments, with companies bringing to the general public the opportunity to invest in assets that, until now, are restricted to those with a larger capital or access to private rounds.

But the future of this technology may go far beyond that. “We are still tokenizing asset classes that already exist in the market. But the potential of tokenization goes beyond the traditional financial market, either in the tokenization of physical assets or in the creation of new assets and business models using tokens,” says Keiji Sakai, PMO (Project Managing Officer) of the OTC Exchange.

In Brazil, the first regulated platform based on tokens was launched in June by Vórtx QR Tokenizadora, which allows the digitalization of securities such as debentures and quotas of closed-end investment funds using blockchain technology, allowing more secure and transparent transactions.

According to Juliano Cornnachia, CEO of Vórtx QR, there has been great demand from companies interested in making issues, but the company is quite judicious in its selection, not least because the contract with the CVM only allows 12 issuers.

“Our preference has been for companies that have a disruption in their core in some way,” he explains.

So far, three issuances have already been made, with a combined volume of R$142 million (US$27 million), an amount that is still the beginning for a segment that led securities issues in 2021 in Brazil, with R$251 billion.

Two other projects focus on creating a secondary market to trade tokenized assets of companies as if they were shares.

Although similar, the proposals of SMU and BEE4 have become complementary since the first focuses on smaller companies, with crowdfunding offerings and funding of up to R$15 million, while the second will work with slightly larger companies but which are not yet large enough to launch an IPO on B3, with offerings of up to R$100 million.

It is a segment still little explored in Brazil and can potentially exploit a huge market in the country.

A recent survey by the Brazilian Micro and Small Business Support Service (Sebrae) shows that the Small and Medium-sized Companies (SMUs) sector generates an income of around R$420 billion per year and that these companies represent 30% of the national Gross Domestic Product (GDP).

In both cases, SMU and BEE4, tokenization was the solution found both for individual investors to have the opportunity to buy assets of small companies and startups, something that today is reserved for large managers and for these companies since it can be challenging to raise capital with their size and higher risk.

As Parfin’s Viriato explains, with tokenization, a company can have the opportunity to access more investors and have access to resources. “It doesn’t mean that it will sell the token, but it has the opportunity to have access; I think that is already a big difference, a big advantage,” he evaluates.

Different from these three in the CVM’s sandbox, there is also the OTC Exchange, approved by the Central Bank, with a platform for trading debt securities of closely-held companies. It will act as a registrar and settler of transactions and have its own system where investors can make operations.

The company is about to carry out its first operation, but according to Sakai, the conversations that have already taken place with interested companies have been positive: “we have observed a great deal of enthusiasm and interest in our operation”.

EXPANDING MARKET

The growth of the tokenization market and the several opportunities in transforming traditional assets into digital representations has called the attention of regulatory agencies and large financial institutions, which see a new revenue opportunity and create a differential in their platforms.

Recently Itaú Unibanco (ITUB4) announced the launch of Itaú Digital Assets, which besides being a tokenization platform, will also offer crypto active assets custody and “token as a service” (TaaS). Vanessa Fernandes, Global Head of the new company, projects that in the coming years, it is possible to think that “10% of market assets will be via tokens”.

The bank has already made an internal test by issuing a token backed by anticipated receivables, called drawn risk. The issue was made on the 4th, with a term of 35 days and a total value of R$360,000, with the sale restricted to some of the bank’s employees and selected Private Bank clients. The intention is that by the end of this year, the platform will be available to any Itaú client.

Nubank is another company that has its eye on this market. After announcing it had reached 1 million crypto users, the fintech company’s CEO David Vélez told the NeoFeed website that it is now targeting the tokenization market.

Looking abroad, it is also possible to assess the space that the tokenization segment still has to grow. As Parfin’s Viriato points out, Europe is quite advanced, with Euronext (the leading stock exchange in the region) already issuing tokens for private assets and shares using the Tokeny platform.

In the US, the executive explains that there are tokenization initiatives but that there is a greater difficulty on the regulation side since the country has conflicts of laws between the state and federal levels, which ends up slowing down the process. But specialists evaluate that the growth of this market should end up changing the way regulation is looked at in the future.

“A recurring discussion in the market is trying to adapt the technology to the operational model and the existing regulation. The point is that technology allows rethinking the models and, eventually, the regulation itself. Therefore, the starting point for an evolution of the market would be to think differently, and not with the paradigms we have accumulated throughout our history,” says Sakai of the OTC Exchange.

Although there are already several tokenization projects in Brazil and abroad, this segment is still starting to grow and has plenty of room for emerging new projects.

“The tokenization process is here to stay and will change how people make investments,” says Cornnachia.

“Asset tokenization is an important move toward uncomplicating the capital market. All the world’s exchanges and organized OTC markets will look to this technology as a new way forward that is as secure as a central depository but cheaper and more accessible,” concludes the CEO of Vortex QR.

With information from InfoMoney

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