Infrastructure Project Tokenization
Infrastructure tokenization will enhance project liquidity opportunities, democratization investments, reduce information asymmetry, and increase pricing and risk information disclosure.
Infrastructure Tokenization is suitable for investable infrastructure assets that support economies, generate long-term stable cash flows, and remain well-structured throughout the entire project life cycle. Appropriate tokenizable infrastructure assets should meet other core characteristics like public use, essential, cash-generating, conducive to the privatization of control, and capital intensive with long-term operational horizons (Anson et al., 2012). The suitability of an infrastructure asset for tokenization is measured by the extent to which these elements are met. Infrastructure asset appreciation and long-term stable cash flows are incentives that attract investors to participate in tokenizing infrastructure assets.
The Underlying Asset
The issuance of blockchain tokens for infrastructure financing starts by identifying the underlying infrastructure asset that must undergo some economic evaluation and audit to comply with the issuing jurisdiction's security regulations. The risks, returns, cash flow expectations, certainty of investment in the asset, and other economic feasibilities are presented to a known audit firm.
A Special Purpose Vehicle (SPV) is formed after the initial identification process for the tokenization (Della Croce and Gatti, 2014). After the legal and deal structures are established, the security token issuance services provider, the know your customer/anti-money laundering (KYC/AML) vendor, custody service provider, and primary/secondary marketplaces are determined and confirmed (Lootsma, 2017).
"A smart contract available within the tokens replaces the traditional contracts."
The Tokenization Process
The management of the SPV sets prices for security tokens. Potential investors need to pass KYC/ AML checks to invest in security tokens. A smart contract that is available within the tokens replaces the traditional contracts. After completing these processes, newly minted security tokens can be transferred to investors’ wallets or listed on token exchanges. “Wallets” refer to digital storage facilities in which blockchain tokens are deposited. Investors can transfer their tokens to other investors or trade them on secondary markets. The dividend or interest payouts generated from tokenized assets are sent out to the wallets of token owners in the form of cryptocurrencies or equivalent fiat currency.
Infrastructure tokenization involves several other major participants as the issuance services provider, escrow company, regulator, legal firm, and secondary trading platform. The role and responsibilities of these participants include the development of the infrastructure facility and deal structuring; offering presentation and technology structuring, smart contract design, assisting asset owners in launching tokens; KYC/AML services, maintaining an allowlist of accredited investors; verification of token transfers; and compliance monitoring.
"Infrastructure tokenization involves several other major participants as the issuance services provider, escrow company, regulator, legal firm, and secondary trading platform."
A Case for Nigerian Electric Power Transmission Tokenization
The Electricity Authority of Benin - Nigerian Electric Power Authority power interconnection project, jointly financed by the African Development Bank, the West African Development Bank, and the Economic Community of West African States, is one of the sparkling flagship projects for regional integration and cooperation in West Africa. Financed under the West Africa Power Pool program, the project connects Benin’s power grid (CEB) to Nigeria (NEPA). The transmission line has a capacity of 450 megawatts and is the most extensive transmission site in Africa, with 330 KV. The project involves the construction of a 70km long 330 KV overhead transmission line from the Ikeja West substation, just outside Lagos, to Sakete in the Benin Republic. (Obed, 2013)
NEPA Ltd is a Nigerian-based electric power producer that focuses on electric energy assets tokenization to develop new technology for improving energy production and transportation efficiency and liquifying electric energy assets in Africa. The equity of this company in the transaction, USD500 million, has been tokenized and issued as NEPA Ltd, which is offered for sale as a security token according to the Investments & Securities Act (ISA) 2007. The NEPACOIN is to be mined on a futuristic date. Since the initial date of Security Token Offering (STO), 500,000,000 NEPACOIN have been issued to 500,000 investors. NEPA Ltd is also building a Utility (Electricity, Water and Fiber Optics) token trading platform to implement blockchain tokenization in the Utility sector and advocate tokenization to the Nigerian public.
"Collaborative and collective efforts by entities, including governments, financial institutions, local communities, private companies, and individuals, are required to develop this infrastructure tokenization."
NEPACOIN is offered to both Nigerian and non-Nigerian investors. Nigerian investors must be accredited as defined under SEC Investments & Securities Act (ISA) 2007. They should be verified by Blockchain Capital, a third-party escrow agent that ensures the token issuers and accredited investors involved in the STO process comply with the rules and regulations. Non-Nigerian investors who participate in the STO of NEPACOIN must comply with Regulation under the Securities Act. However, non-USA investors are not required to be certified as accredited investors. As such, these investors face fewer limitations than Nigerian investors. The minimum investment of each investor is 1000 NEPACOIN, which is equivalent to $300.
The Security Token Offering (STO)
Potential investors invest in NEPACOIN by completing simple subscription agreements submitted to NEPA Ltd. KYC/AML for all token investors by a third-party KYC company to ensure compliance with SEC regulations. When an investor is deemed qualified to invest in NEPACOIN, NEPA mints and transfers a certain amount of NEPACOIN to the token wallet of the investor company. After the investor’s fund is cleared, NEPA initiates the token transfer, which requires the participation of a pre-qualified transfer agent.
"The potential of tokenization can not be fully realized until the challenge of limited technical infrastructure, regulation uncertainties, and volatilities in the token market are resolved."
This transfer agent manages detailed transaction records containing the identifications of token owners and wallet addresses where tokens are stored and stored. The rights to the company’s Class A securities, incorporation certificates, and bylaws are embedded into the smart contract of each NEPACOIN. All associated rights with the token are transferable among authorized investors in transferring and primary and secondary trading.
This conceptual framework for infrastructure refinancing through blockchain tokenization highlights the opportunities for emerging technologies to disrupt infrastructure financing mechanisms. The benefits of infrastructure tokenization include liquidity opportunities, the democratization of investments, reduced information asymmetry, and increased pricing and risk information disclosure. However, the potential of tokenization can not be fully realized until the challenge of limited technical infrastructure, regulation uncertainties, and volatilities in the token market are resolved. Collaborative and collective efforts by entities, including governments, financial institutions, local communities, private companies, and individuals, are required to develop this infrastructure tokenization.
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