Tokenization could make finance faster but also more prone to sudden shocks, IMF warns

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.