Tokenized Private Credit: How It Works

What is private credit?

Private credit is a form of debt financing in which the lender is usually an asset manager, fund or other non-bank institution, and the loan is negotiated privately instead of being sold on a public bond market. The borrower is often a company that wants speed, flexibility or terms a bank would not offer.

The key features are generic:

• Direct negotiation. The lender and the borrower agree the terms, including the interest rate, maturity, covenants and security.
• Held, not traded. Most loans are held to maturity, and there is no public price feed.
• Fund structures. Investors often take part through a fund or a managed vehicle that pools loans, with rules on when they can subscribe and redeem.
• Private information. The documents and borrower data are not published widely, so investors depend on the manager's reporting.

Because of these features, private credit is called illiquid. An investor who wants to exit before maturity may find few buyers, no published price and a long process. That illiquidity is the problem tokenization is trying to ease.

Why private credit is being tokenized

Tokenization is the recording of ownership of an asset as a digital token, with rules built in for who may hold and transfer it. The RWA tokenization overview covers the concept. For private credit, the reasons cited by issuers and investors tend to fall into four groups: The BIS describes the range of designs in The tokenisation continuum.

• Record keeping. A shared ledger can replace a patchwork of spreadsheets, emails and transfer agent files with one record of who holds what.
• Smaller or more flexible units. A loan or fund interest can be split into units that are easier to allocate and transfer.
• Programmable rules. Transfer restrictions, investor eligibility and lock-up periods can be encoded in the token, so a non-eligible holder cannot receive it.
• A route to secondary trading. Once the record is digital and the rules are enforced, a venue can match buyers and sellers without a manual process for each transfer.

None of these removes the credit risk. A tokenized loan still depends on the borrower's ability to pay, the quality of the security and the manager's skill. Tokenization changes how the claim is recorded and moved, not what the claim is worth.

Digital representation also does not automatically create liquid markets. Per the Mercury RWA materials, what is missing is institutional-grade infrastructure, proper market structure, aligned economic incentives and active trading mechanisms.

Tokenized private credit vs tokenized funds

The two terms overlap, and it helps to separate them.

The token is not the loan. It is a record of a claim that sits inside a legal structure. That structure decides what the holder owns and what rights the holder has if something goes wrong, which is why the legal wrapper is the first thing to read.

In many jurisdictions a tokenized interest of this kind is treated as a security, which brings eligibility checks, disclosure and venue rules. The FSB reviews the risks in The Financial Stability Implications of Tokenisation.

How primary issuance and secondary trading differ

Two stages matter.

• Primary issuance. The issuer creates the tokens and sells them to eligible investors against payment. Pricing and allocation are set by the issuer.
• Secondary trading. A holder sells tokens to another eligible investor after issuance, at a price set by the market. This is where liquidity is created or not.

Most tokenization effort has gone into the first stage. The second stage needs a venue, because buyers and sellers must find each other, agree a price and complete the exchange of token for cash.

How secondary liquidity works on an ATS or marketplace

A secondaries marketplace is a venue where holders of a private asset can sell it to other eligible buyers before it matures or is redeemed. In digital assets the venue is often an alternative trading system, a regulated trading venue for securities that does not carry a full exchange listing. The alternative trading system page explains what an ATS is and how it is regulated, and the tokenized securities marketplace page covers the venue side for tokenized assets. In the EU, the DLT Pilot Regime sets a separate framework for trading and settling tokenised securities on DLT market infrastructure.

A secondary trade on such a venue follows a sequence:

1. Eligibility. Buyer and seller are checked for identity and for eligibility to hold the asset.
2. Order or quote. The seller posts an offer, or a buyer requests a quote. Because there is no continuous public price, quote-based and negotiated trading is common.
3. Match and price. The venue pairs the two sides and records the agreed price and size.
4. Transfer-rule check. The system confirms that the transfer meets the token's restrictions.
5. Settlement. Token and cash move together. See the next section.
6. Record update. The register of holders updates, and both sides receive confirmations.

Liquidity in private credit is still thin by nature. A venue creates a place to trade, but it cannot guarantee a buyer at any price. A buyer may need to see the loan documents, and the pool of eligible buyers is limited. Investors should treat secondary access as a possible exit, not a promised one.

Settlement: why DvP matters

When a token is sold for cash, the risk is that one leg completes and the other does not. Delivery versus payment ties the two legs together, so the token moves only if the payment moves, and neither side is exposed if the other fails to deliver.

For private credit the settlement path usually needs three things:

• Custody. The tokens and the cash sit with institutions that can hold them under the right controls.
• Position keeping. A ledger tracks every holder's position in real time and reconciles across fiat and tokens.
• Compliance at the point of transfer. KYC checks and transfer restrictions run before the trade settles, not after.

The Mercury RWA materials describe this pattern: Mercury Ledger position keeping, multi-asset reconciliation across fiat and tokens, BitGo custody connectivity and KYC verification in the workflow, and delivery-versus-payment execution. The BIS Principles for financial market infrastructures explain why linking the two legs of a trade matters.

What an institution needs from infrastructure

An institution looking at tokenized private credit should be able to answer these questions about the platform it uses:

• Eligibility and onboarding. Can the platform verify each investor and apply the token's rules automatically?
• Venue access. Is there a regulated place to trade, and who can use it?
• Pricing. How is a price formed when there is no continuous market? Does the platform support quotes and negotiation?
• Settlement. Is settlement delivery versus payment, and who holds the assets in between?
• Custody. Who holds the tokens and the cash, and are they segregated from the venue?
• Reporting and audit. Can the firm produce a complete trail of orders, transfers and holdings for its own records and for auditors?
• Integration. Does the platform connect to the firm's existing order, risk and accounting systems?

Liquid Mercury, the Chicago-based institutional digital asset infrastructure provider, describes Mercury RWA as the secondary-market and settlement layer for tokenized assets, with automated KYC and AML, programmable transfer restrictions, and audit and reporting. It is not an issuer of private credit products, and this page does not claim that any private credit asset trades on it today.

Risks and checks

• Credit risk. The borrower may not pay. Tokenization does not change that.
• Valuation. Without a public price, the value of a position may rely on the manager's estimate.
• Liquidity risk. A venue exists, but buyers may not.
• Legal structure. The token's rights depend on the documents. Read them.
• Transfer restrictions. Many tokens can move only between approved wallets.
• Operational risk. Custody, settlement and record keeping must work together.

This page is educational and is not investment advice.