In a new report released by the World Bank, blockchain technology is being examined as a potential game-changer for infrastructure projects, including roads, power plants, and renewable energy initiatives. The report evaluates the feasibility of tokenized securities for the development of real world infrastructure projects.
The study comes at a crucial time as the Global Infrastructure Hub estimates a staggering $15 trillion financing gap for infrastructure projects between 2018 and 2040.
Governments currently bear the brunt of the $3 to $4 trillion spent annually on infrastructure, with private investment through primary issuances only amounting to a mere $106 billion in 2019.
With the strain caused by the COVID pandemic on government budgets, there is a growing interest in exploring alternative sources of funding, particularly from the private sector.
Democratizing access to investment infrastructure
One of the ways blockchain technology could address this funding gap is through tokenization, whereby infrastructure securities, whether debt or equity, are converted into digital tokens. This process has the potential to reduce issuance costs, though the involvement of a special purpose vehicle would still be necessary.
Moreover, tokenization could democratize access to infrastructure investment, making it more accessible to a wider range of investors, rather than being limited to institutions or ultra high net worth individuals.
Traditionally, banks, export credit agencies and large donor agencies have taken on the responsibility of providing substantial debt for large scale infrastructure ventures. However, with the emergence of blockchain technology, DeFi changes this. Lenders can become direct equity investors for the infrastructure development company.
Increasing project efficiency with blockchain data
Beyond funding, blockchain’s transparency offers another valuable application for infrastructure projects.
By utilizing blockchain technology, data related to purchase orders and invoicing can be shared between subcontractors and contractors, minimizing potential disputes and improving project management at the budgetary level.
The report explores enhanced liquidity, efficiency gains, transparency and risks associated with tokenizing infrastructure. It also examines the governance risks, legal status considerations and cyber security concerns when working with emerging technology to scale infrastructure finance solutions.
While the report primarily focuses on the financial aspects of blockchain implementation, it acknowledges significant challenges, particularly in the regulatory realm. Few jurisdictions have clearly defined regulations for tokenized securities.
Interestingly they outline details of case studies from Switzerland, China, Luxembourg, France, Australia and the United States, indicating the level of interest in the sector to date.
Despite the challenges in targeting retail investors, reducing the minimum investment threshold has the potential to greatly expand the investor base, including accredited investors who could access it through regulated venues. Public blockchains are seen as an ideal avenue for fractionalization of investments.
The mechanics of DeFi lending, already showcased by pioneers like Maker DAO, Aave, and Compound, are now being directed towards funding traditional infrastructure projects. In fact, navigating the path to finance these projects is relatively straightforward when compared to the monumental effort invested in building the underlying blockchain technology.
The synergy between blockchain and DeFi lending unveils a new opportunity to revolutionize the way new, ambitious infrastructure projects are financed.
