IMF says tokenized finance could worsen market crises
The International Monetary Fund warns that transitioning Wall Street’s trading infrastructure to blockchain-based systems could hasten financial crises beyond the capacity of regulators to manage, despite the technology’s potential to reduce costs and eliminate settlement delays. Tokenization — the act of representing assets like stocks, bonds and cash as digital tokens on shared ledgers — is a structural overhaul of financial architecture rather than a marginal efficiency gain, the IMF’s Tobias Adrian stated in a report published on Thursday.
Banks, clearing houses, and asset managers such as BlackRock Inc. and JPMorgan Chase & Co. are currently conducting live pilots to evaluate a technology aimed at increasing fees by facilitating the trading of traditional assets like stocks and bonds. In September, Nasdaq pursued approval from the US Securities and Exchange Commission to enable the tokenization of stocks and their trading on regulated platforms such as its own. Earlier this year, the New York Stock Exchange announced that it is developing a venue utilizing blockchain technology to facilitate the trading of tokenized stocks and exchange-traded funds continuously. SEC Chairman Paul Atkins has expressed his support for tokenization.
The technology will enable trades to progress more swiftly through the system; however, what some perceive as a benefit is also a potential weakness, stated Adrian. “Stress events are likely to unfold faster, leaving less time for discretionary intervention,” he wrote. He noted that settlement delays act as buffers, providing central banks and regulators with the necessary time to intervene during crises. In a system that settles instantly and continuously, regulators have minimal opportunity to intervene before margin calls occur. A tokenized system operates continuously — however, central bank emergency lending facilities were designed for crises that occur during business hours, he stated. He also likened privately issued stablecoins, which are being used more frequently as settlement assets in tokenized markets, to money-market funds: effective in stable conditions but susceptible to runs.
The note outlined three scenarios for the evolution of tokenized finance: a coordinated system anchored by central bank digital currencies, a fragmented patchwork of incompatible national platforms, or a landscape dominated by private stablecoins, leading to weakened public backstops. Adrian emphasized that policies need to address the fundamental shifts in trust and risk associated with tokenized infrastructures, proposing measures such as securing settlement in reliable currency and defining the legal framework for tokenized assets. “Achieving this outcome requires policymakers to engage proactively with the structural implications of digital transformation, rather than respond reactively to its manifestations,” the note stated. “The window for shaping the architecture of the tokenized financial system is open, but it will not remain so indefinitely.”
