Tokenizing Bankruptcy Claims

As the world of blockchain technology continues to evolve and develop, an increasingly popular option for asset holders is to tokenize their investments. 

Tokenizing an asset – that is, turning an asset (typically, but not necessarily, a financial instrument) into a digital certificate stored on a piece of immutable blockchain data – has many advantages over traditional methods of ownership. This is evident in the inherent properties of crypto: fungibility, transparency, and liquidity. 

In this article, we’ll take a closer look at some key benefits associated with tokenizing your claim, including increased liquidity, better price discovery and more transparent pricing. Read on to learn why tokenization could be the right way forward for claim holders who are looking to access liquidity. 

What is asset tokenization?

Simply put, asset tokenization is the process of converting financial instruments or real assets, such as property or art, into digital tokens that have a financial value. These tokens can then be traded or exchanged just like any other cryptocurrency, making it easier for people to invest in assets they may not have been able to access otherwise. 

Tokenization is made possible through the use of blockchain technology, which provides a secure and transparent way to track ownership and transactions. This opens up a world of possibilities for buyers and sellers, who can now trade investments that were previously illiquid assets or difficult to divide into smaller, more manageable pieces. 

Tokenization has become a game-changing technology, and as crypto continues to gain mainstream adoption, it's only going to become more important.

Benefits of asset tokenization

Tokenizing an asset class means bringing about greater liquidity, easier access to capital, and more price transparency for the underlying asset.  

One key advantage of tokenization that leads to these benefits is fungibility. In simple terms, when an asset is fungible, it means that it is interchangeable with another asset of the same type, without affecting its value. Tokenization enables the creation of digital tokens that represent a fraction of an asset's value, and can be easily traded with other tokens or fiat currencies on an exchange. 

Because of its fungible nature, tokenization reduces transaction costs. On OPNX, claims are pooled and made tradeable on order books. This, in turn, leads to more price transparency and better pricing for claim holders. Importantly, both small and large claim holders can trade their claim and benefit from this scalability.

How are claims currently traded?

Currently, bankruptcy claims are largely traded over-the-counter (OTC) and remain relatively illiquid assets. Trading claims via OTC yields a number of challenges around claim management, claim trading and general risk management. 

Claim management

• High legal fees (up to 30% contingency fees)
• No dismissal of legal risks 

Claim trading

• Vulture pricing, limited market transparency
• One-way traffic (once you sell, not easy to rebuy)
• Allowed claim amount can differ and be a cost to creditor post-sale*

Risk management

• Fraud risk
• Understanding of ongoing legal risk

In the following sections, we’ll focus on the challenges OTC trading poses on claims trading versus order book-based trading. 

How claim tokenization can help with risk management

Some of the risks associated with bankruptcy claim trading via OTC include:

Uncertainty of payout: While OTC trading is one option for claim holders and offers one path to liquidity, it leaves plenty of room for the potential price manipulation due to the lack of transparency. In other words, there is risk of significant underpayment. Buyers typically have more information about the claim than the average seller about the “fair market value” of claims. This uncertainty can result in investors paying too much for claims or selling them at a loss.

Limited liquidity: The market for bankruptcy claims is relatively illiquid, meaning that it may be difficult for investors to buy or sell claims at the prices they desire. This can lead to investors being stuck with claims that they are unable to sell. Due to economic constraints, OTC trading is not a viable option for all claim holders.

Legal risks: Additionally, OTC sales open up many counterparty risks. Sellers have been subject to risks such as payment fraud, individuals impersonating buyers (e.g. for phishing attacks), cancelling deals at significant cost, and conducting deals with no legal/regulatory protections. 

How OPNX manages claim trading

Recent bankruptcies in the crypto industry have left over 20 million users out of pocket by $20 billion USD, with funds locked up on various bankrupt platforms. We believe OPNX can provide a valuable service to a large percentage of these bankruptcy victims especially as many average claim holders don’t have access to OTC claim deals. In addition, there are also no centralized markets for trading tokenized bankruptcy claims. OPNX will be the first to provide claims trading on order books. 

OPNX is partnering with Heimdall, a tokenization solution provider, to manage the onboarding, verification, and tokenization of various asset classes, starting with claims. Together, we aim to standardize the claims trading process through a tokenized claim trading market. With the understanding that claims come with large variation and a variety of associated risks, Heimdall collates claims into dedicated trusts, which derisks standalone creditors. Importantly, if a single claim is disallowed, subordinated, or adversely affected, at scale, the value of the trust is not impacted. 

Fungible tokens are issued against the vehicle, which are liquid and made tradeable on OPNX. This process extracts the legal headache around managing the claim as the holder transfers their legal ownership of the underlying claim to the trust, whilst maintaining the economic rights attached to the token. 

Trade your claim on OPNX today

If you’re looking for a claim trading experience where there is…

• No need to track status of ongoing claim bids and offers
• No need to separately compare multiple offers
• No need to trust your counterparty will complete the transaction at point of sale
• Transparent order book pricing for claims
• An automated claim onboarding process

Register for an account today and turn your claim into an opportunity on OPNX!