Tokenization could make finance faster, but also more susceptible to shocks, IMF says

Tokenization, the process of moving financial assets into a blockchain environment, could make markets faster and cheaper. It could also make them more vulnerable to shocks, the International Monetary Fund (IMF) warned Thursday.

"Frictions disappear — but so do buffers," Tobias Adrian, the IMF's head of monetary and capital markets, wrote in a blog post.

Tokenization represents financial assets, such as stocks, bonds and bank deposits, on shared digital ledgers. Smart contracts execute trades, transfer ownership and process payments much faster than in traditional finance (TradFi), where it can take days.

In TradFi, a trade is executed, cleared, settled and reconciled, with each step handled by a different institution. A seller may not receive the proceeds and a buyer the shares for two days or more. For a tokenized asset, the process takes seconds.

"When a tokenized asset changes hands, smart contracts can execute trades, transfer ownership, and move payments simultaneously — all on a shared ledger. Processes that once required days of clearing and reconciliation are now completed in moments," Adrian said.

There are other advantages too. Tokenization enables different forms of digital money, such as tokenized bank deposits, fiat-pegged stablecoins, and tokenized central bank reserves to function seamlessly as settlement assets on the same ledger.

It also allows high-quality assets to be quickly deployed across platforms as collateral.

But all this is not without risk.

The hidden danger

The delays that tokenization eliminates aren't just inefficiencies, Adrian wrote. They also give banks, regulators and risk managers time to catch problems before they spread.

Remove this buffer, and a market shock, a coding error, or a sudden wave of automated selling could ripple through the system before anyone can intervene.

"Liquidity demands materialize in real time, collateral calls can be automated, and failures can propagate faster than institutions or supervisors can respond," he wrote. "Risk [sic] that once were borne by the balance sheet of individual institutions behind a transaction become increasingly concentrated in the platforms and code that govern these transactions."

Adrian also flagged concentration risk. Tokenization tends to funnel activity onto fewer, larger platforms. "When infrastructure becomes the central hub," he warned, "governance failures become systemic events."

On cybersecurity, he warned that consolidation onto shared ledgers "amplifies the importance of operational resilience, cybersecurity, and crisis management."