Tokenizing private credit won’t fix who bears the losses
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Benjamin Sarquis Peillard is founder and CEO of Cap, an on-chain credit platform that uses financial guarantees to protect lenders from borrower defaults.
Blockchain has been seen as a default solution to almost every problem in the fintech space, including to ones it was never designed to solve. Private credit is the latest vertical that’s garnered attention as it transitions on-chain. Asset managers are racing to tokenize funds, exchanges are courting institutional issuers, and headlines suggest that putting loans on-chain will advance an asset class forward that has recently generated some of the most uncomfortable headlines in finance. But maybe we’re missing the forest for the trees, because tokenization is simply a settlement technology and the problem in private credit isn’t settlement, it’s misaligned incentives and underwriting, and more specifically, who bears the consequences when underwriting goes wrong.
The excitement around blockchain makes sense, as tokenized real-world assets have grown past $33 billion according to one October 2025 estimate, and tokenized private credit alone now accounts for more than $18 billion of that figure, up more than 74 percent over the prior twelve months. Settlement that used to take days can now happen in seconds and smart contracts distribute interest and principal payments automatically instead of routing through manual reconciliation. Proof-of-reserve tools also give investors a way to verify that the collateral described in a term sheet actually exists. These are, believe it or not, big steps forward and genuine improvements that no one serious about the technology is taking for granted.
Yet, settlement speed doesn’t touch the part of private credit that is actually failing. Fitch Ratings reported that the U.S. private credit default rate climbed to 5.8% in January 2026, continuing a trend that has alarmed allocators who were told this asset class offered bond-like stability with equity-like returns. The stress has also shown up just as sharply in liquidity. Investors requested $15.6 billion in redemptions from private credit funds in the second quarter of 2026 alone, and managers returned only $5.9 billion of it, leaving a backlog of roughly $9.7 billion in unmet requests. None of that is a settlement problem. A faster ledger doesn’t change how a loan was underwritten in the first place, and it doesn’t change who absorbs the loss when a borrower can’t pay. That is the part of the ‘private credit coming on-chain’ story that blockchain advocates tend to skip.
Tokenization leaves the incentives intact
Traditional private credit is built on a separation between the people who earn fees and the people who carry long-term risk; a fund manager originates a loan, collects a fee, then essentially steps back from the consequences of that decision. The capital providers, whether they are pension funds, insurance companies, or (increasingly) retail investors through semi-liquid vehicles, are the ones left holding the loan if it goes bad. This is a textbook principal-agent problem, and it isn’t new. It is the same structural gap that has produced credit failures for decades, in both public and private markets alike.
Tokenizing the fund doesn’t close that gap, it just moves the same fund structure onto a blockchain. The manager still earns the origination fee and the token holder still bears the downside, but in some cases the incentives actually get worse. When a private credit position becomes a tradable token, everyone wants exposure to the yield and almost no one wants the job of actually making a market in the underlying claim. A number of tokenized credit products have discovered this by watching thin secondary markets and passive holding patterns emerge almost immediately after launch.
There’s also the fact that bringing a credit fund on-chain does not in and of itself create investor demand for that fund, it really only creates a distribution channel. A tokenized wrapper around a mediocre underwriting process is still a mediocre underwriting process, just with a faster way to exit before other holders notice. Some of the credit products migrating onto public blockchains look less like product innovation and more like an efficient way to source retail liquidity for positions institutional investors have already grown cautious about. Analysts have warned about contagion running the other direction too, with stress in traditional private credit spilling into digital asset markets as investors who can’t get liquidity from a locked vehicle sell whatever liquid assets they hold, including crypto, to meet their own obligations. Tokenization didn't cause that dynamic, but it did nothing to prevent it either.
However, we can rest easy as none of this means blockchain has no role to play in fixing private credit, it simply means the role has to be structural rather than cosmetic. The interesting question isn’t whether a loan can be represented as a token. It is whether the architecture of a credit system can be rebuilt so that the incentives are aligned from the start, in a way that a legacy fund wrapped in a token can never quite replicate.
A model that puts originators’ capital at risk
A more useful model inverts the traditional fund structure instead of digitizing it. Rather than a manager making credit decisions on behalf of passive token holders, the people originating loans put their own capital behind the decisions they make. An originator who wants to lend against a borrower's business doesn’t simply collect a fee and pass the risk along; they post collateral, in dollars or other liquid assets, that is directly at stake if the borrower fails to perform. If the loan is repaid, the originator earns a spread for assessing the risk correctly. If it's not, the originator's own capital absorbs the loss before anyone who supplied liquidity to the system does. This makes it so the incentive to underwrite carefully is no longer a matter of professional reputation, but rather a direct, enforceable consequence. This is where blockchain solutions earn their laurels, rather than functioning as marketing hype plastered on top of an unchanged process.
Code can enforce a guarantee in a way a bilateral legal agreement can’t. For instance, when a borrower becomes insolvent, the resolution doesn’t require years of litigation to determine who was owed what and whether collateral was pledged honestly. It can be settled within the same block that the default is recognized, because the collateral was already escrowed under terms that don’t depend on anyone's good faith after the fact. The parts of the system that require this kind of objective enforcement, such as solvency, collateral status, and default triggers belong on-chain. Yet the parts that require judgment, like assessing a borrower's actual business prospects, do not. They should be handled by someone with real expertise and real capital exposed to being wrong.
Built this way, a credit system has three participants instead of two, and each one brings something the others don’t have. Capital providers bring the dollars (which everyone wants!), or other liquid collateral such as Bitcoin or tokenized gold, that the system needs to fund loans. Originators bring the due diligence and specialized expertise required to evaluate a specific borrower along with the capital they are willing to put behind their own judgment. Borrowers bring the underlying business activity that generates the return in the first place, and in exchange for accepting an originator's capital at risk on their behalf, they gain access to financing on better terms than a system with no true underwriter accountability could reasonably offer.
Of course, this structure won’t eliminate defaults — but then again, no credit system can. What it can do is make sure that when a loan goes bad, the loss lands first on the party who was paid to evaluate that risk, rather than on an investor several steps removed from the actual decision. That is a meaningfully different outcome than what most private credit investors, tokenized or not, are currently exposed to.
The fintech industry's enthusiasm for bringing things on-chain is not misplaced, but is aimed at the wrong layer of the problem. Faster settlement and better verifiability are real improvements worth having, but they are improvements to the infrastructure, where the real magic happens is creating skin in the game for underwriters making decisions. Ultimately, private credit really needs a structure where those who are making the decisions of where capital flows to generate returns can’t escape the consequences if something goes wrong. Blockchain can help build that structure and more accurately align incentives for each party involved while also helping to fix bad underwriting by truly discouraging negative behavior. This will be the difference between an industry that simply repeats its mistakes, and one that finally stops making them.
