The redemption problem: liquidity design for non-redeemable loan assets

Why can’t investors simply redeem out of a loan-backed structure whenever they want?

Because the assets underneath are loans, and a loan is not a deposit. A loan pays principal and interest back on its own contractual schedule, and it generally cannot be called back early at the lender’s convenience. So a fund built on those loans cannot return an investor’s capital on demand unless it does one of two expensive things: hold a large pile of idle cash that earns nothing, or sell assets — often at a discount — to raise the money. This is the redemption problem, and it sits at the center of any honest attempt to put private-credit assets into an investable wrapper.

The mismatch is structural, not a flaw to be patched over. On one side, the underlying loans are non-redeemable — they repay over time, not on request. On the other, investors naturally want a way out before every loan in the pool matures. Good liquidity design does not pretend this tension away with a promise of instant exit; it builds explicit, funded mechanisms that manage the gap and discloses them up front. This post walks through what the gap is, why pretending it isn’t there is dangerous, and the three design levers a structure can use to manage it.

What does “non-redeemable underlying asset” actually mean?

It means the cash an investor put in is not sitting in an account waiting to be handed back — it has been lent to borrowers who will repay it on their loan’s timetable. A loan receivable is the right to receive future repayments, not a balance available on demand.

In root64’s structure, the assets a Korean special-purpose company (SPC) holds are exactly this kind of instrument: the right to receive principal and interest (원리금수취권) on Korean loans. (For how that right works and why the SPC holds it, see /blog/right-to-receive-principal-and-interest and /blog/how-root64-holds-korean-loan-assets.) Until a borrower repays, the money is working inside a loan. That is the whole point of the asset class — and it is also why this asset class pays an illiquidity premium in the first place. As one asset manager puts it for private credit generally, “illiquidity is a feature, not a flaw”: investors are compensated for giving up the ability to exit instantly, because the manager can lend to borrowers who need committed, term capital rather than money that might be yanked at any moment (AllianceBernstein — In Private Credit, Illiquidity Is a Feature, Not a Flaw, accessed June 2026).

The practical consequence: the natural liquidity of a loan-backed structure is the rhythm of its repayments. Capital flows back to investors as loans amortize and mature, not as a button an investor can press. Any liquidity offered faster than that rhythm has to be funded from somewhere — and where it is funded from is the entire design question.

Why is pretending a loan pool is “daily redeemable” dangerous?

Because promising more liquidity than the assets can deliver creates a first-mover problem: under stress, whoever exits first gets paid from the easy cash, and whoever stays is left holding the hard-to-sell loans. The promise is fine right up until everyone tries to use it at once.

This is not a theoretical worry — it is the exact vulnerability global financial regulators have spent years addressing. The Financial Stability Board (FSB) and IOSCO, on 20 December 2023, published final policy recommendations specifically to address “structural vulnerabilities from liquidity mismatch in open-ended funds,” whose central concern is the gap between assets that are slow to sell and fund units that can be redeemed quickly (FSB — policies to address liquidity mismatch in open-ended funds, December 20, 2023). Their framework groups funds by how liquid their assets actually are and expects funds holding illiquid assets to offer less frequent redemption or longer notice periods — in other words, to match the redemption promise to the asset, not the other way around.

The mechanism the regulators name explicitly is the first-mover advantage. The recommendations aim “to mitigate potential first-mover advantage from structural liquidity mismatch” by making redeeming investors bear the cost of the liquidity they are taking, so that exiting early does not quietly transfer losses onto the investors who remain (FSB — December 20, 2023). The lesson for any loan-backed structure is direct: a daily-redemption promise layered over non-redeemable loans is not generous, it is fragile. The honest move is to design liquidity that the assets can actually support, and to be explicit about its limits.

How can a structure provide liquidity without misrepresenting the assets?

By offering liquidity through funded, scheduled mechanisms rather than an unconditional on-demand promise. There are three main levers, and a well-designed structure uses them in combination rather than relying on any one.

Liquidity lever	How it works	What it depends on
Periodic redemption window	At set intervals, investors can request redemption; requests are funded from loan repayments that have actually come in	Incoming repayments; requests met in order if they exceed available funds
Transfer to another investor	An exiting investor’s position is taken over by another professional investor, rather than the pool being drawn down	A counterparty willing to buy; a venue or process for transfer
Maturity matching	An investment is sized and timed to a loan’s own maturity, so capital returns naturally as the loan repays	The investor accepting a term that fits the underlying asset

Source: root64 business structure, redemption and token-lifecycle design, as of June 2026.

Each lever addresses the mismatch from a different angle. A redemption window converts the loan pool’s natural repayment rhythm into predictable exit opportunities. Transfer moves a position sideways to a new holder without forcing the pool to sell assets at all. Maturity matching avoids the mismatch at the source by aligning the investment horizon with the asset horizon. The sections below take the first two in turn — maturity matching is the simplest case, where the question of early exit largely does not arise because the investor signed up for the loan’s own clock.

How does a redemption window work?

A redemption window is a scheduled opportunity to request redemption, funded by repayments that have genuinely flowed in — not a guarantee of instant, full payout on any chosen day. In root64’s design, when an investor requests redemption, the structure stops reinvesting the repayments attributable to that position and instead accumulates them; as loans repay, the accumulated cash funds the redemption, and requests are honored in order. Because the assets are loan receivables, immediate redemption is not available; recovered principal and interest fund redemptions as they come in.

This is the same principle that regulated semi-liquid vehicles use, which is why the comparison is useful for grounding rather than novelty. U.S. interval funds — closed-end funds that offer limited periodic liquidity — make repurchase offers for a set slice of shares at regular intervals under SEC Rule 23c-3, “typically between 5% and 25%” of the fund at each interval, most commonly 5% (Investor.gov — Interval Funds). Critically, that liquidity is bounded and disclosed: if redemption requests in a given window exceed the amount available, “you might not be able to sell as many shares as you had intended” (FINRA — Interval Funds: 6 Things to Know). The honesty is in the limit being stated up front, not discovered under stress.

The general design principle root64 follows is the same: liquidity is real but bounded, periodic, and funded by actual repayments. A redemption window is an exit opportunity governed by the pace of the underlying loans — not a contradiction of the fact that those loans are non-redeemable. The specific cadence, notice, and any size limits of a given window are set per arrangement and disclosed to investors in offering documents; this post deliberately does not state particular terms, because they vary and are not generalizable.

How does transfer to another investor create liquidity?

Transfer creates liquidity by moving an investor’s position to a different holder instead of pulling cash out of the pool. If an investor wants to exit and another professional investor is willing to step in, the position changes hands and the underlying loans are never disturbed — no asset has to be sold, and no redemption queue is drawn down.

This is the secondary-market lever, and it is structurally the cleanest, because it sidesteps the redemption problem entirely: one investor’s exit is another’s entry, and the pool’s loans keep running undisturbed. It is also where tokenization is genuinely useful. Representing a position as a transferable on-chain unit is designed to make this hand-off cleaner — a transfer of the token is the transfer of the position — which is part of why root64 builds toward transferable units in a later phase. (How that on-chain representation and its verifiability are meant to work is covered in /blog/how-to-verify-root64-on-chain-proofs and /blog/what-is-root64.)

Two honest caveats apply. First, transfer depends on there being a willing counterparty; a secondary route provides liquidity only to the extent a buyer exists at a price both sides accept, which is not guaranteed at any moment. Second — and this is a hard constraint, not a preference — any such transfer is between professional investors through private placement. The token-issuance tier that would carry these positions is a planned phase through a Hong Kong vehicle, contingent on regulatory clearance and not yet operating; the vehicle is not yet formed. So secondary transfer is a designed-for capability of the structure, not a live, generally available marketplace today. (On who can participate and the cross-border access constraints, see /blog/how-foreign-investors-access-korean-loan-assets.)

How does maturity matching reduce the need for redemption at all?

Maturity matching reduces the need for early exit by aligning the investment’s horizon with the loan’s horizon from the start, so that capital returns naturally when the underlying loan repays. If the term an investor signs up for fits the maturity of the assets backing it, “early redemption” is no longer the primary way out — repayment is.

This is the same logic that has long governed institutional private credit, where closed-end, term-committed structures dominate precisely because loans are illiquid and “investors often hold the loan until maturity” (AllianceBernstein — illiquidity is a feature, accessed June 2026). Term commitment is not a defect of the asset class; it is the mechanism by which the illiquidity premium is earned. A structure that matches investor terms to asset maturities is being faithful to that economics rather than fighting it.

In practice no real pool matches perfectly — borrowers prepay, some loans extend, and investor horizons differ — which is exactly why the other two levers exist alongside it. Maturity matching shrinks the mismatch; redemption windows and transfer manage what mismatch remains. The combination is the design: reduce the gap at the source where you can, and provide funded, bounded, disclosed liquidity for the rest.

How does root64 think about redemption and liquidity overall?

By treating liquidity as something to engineer honestly, not something to over-promise. The underlying loans are non-redeemable, so the structure does not offer instant on-demand redemption; instead it combines maturity matching to shrink the mismatch, redemption windows funded by actual repayments to provide periodic exit, and transfer to another professional investor to move positions without disturbing the pool.

The throughline connects to root64’s broader posture of transparency before tokenization (see /blog/transparency-before-tokenization). Honest liquidity design and honest reporting are the same discipline applied to two different questions: do not represent the asset as something it is not. A loan pool that records its actual cash movements on-chain and a redemption mechanism that pays out from actual repayments are both refusals to paper over the reality of the asset. None of this is a return guarantee — the underlying loans carry credit risk, and how much an investor receives depends on how the loans perform. Liquidity design governs the path capital takes back to investors; it does not change what the assets earn. For context on the asset class itself, see /blog/korean-private-credit-explained and, for the regulatory backdrop in Korea, /blog/korea-online-investment-linked-finance-act-explained.

The redemption problem has no magic solution, and any platform claiming otherwise should invite scrutiny. What a well-built structure can do is make the constraint explicit, design around it with funded and bounded mechanisms, and disclose the limits before an investor commits — which is the difference between a liquidity promise that holds under stress and one that breaks exactly when it is tested.