Tokenization makes finance more efficient but introduces risks: IMF

The IMF said tokenization could improve cross-border payments and financial inclusion in emerging economies but cited concerns over volatility and the “erosion of monetary sovereignty.”

The International Monetary Fund said tokenization has the potential to remove friction and boost transparency in finance, but warned that the technology could also create challenges that affect financial stability.

"The net effect of tokenization on financial stability is uncertain,” the IMF said in a 23-page report on Thursday, stating that “atomic settlement and enhanced transparency reduce some traditional risks, but speed and automation introduce new ones.”

More than $27.6 billion worth of real-world assets, minus stablecoins, is currently tokenized onchain, data from RWA.xyz shows. Boston Consulting Group estimated in 2022 that the tokenization market could rise to $16 trillion by 2030, while McKinsey & Co in 2024 predicted a more conservative $2 trillion over the same time frame.

The IMF acknowledged that tokenization expands how securities and other financial products are issued, traded, settled and managed but said it shifts risks from the banking system to shared ledgers and smart contract code.

The agency also said tokenization offers opportunities in emerging markets, such as faster cross-border payments and financial inclusion but added that it “raises the risk of volatile capital flows, rapid currency substitution, and erosion of monetary sovereignty.”

Blockchain tokenization has been pushed by Wall Street leaders such as BlackRock CEO Larry Fink, who is among those seeking to tokenize everything from stocks and bonds to money market funds and real estate.

The biggest RWA project by total value locked is Securitize — the tokenization platform behind the BlackRock USD Institutional Digital Liquidity Fund — at $3.38 billion, according to CryptoDep, citing data from April 1.

Tether Gold and Ondo Finance are close behind at $3.35 billion and $3.21 billion, respectively.

The New York Stock Exchange’s parent, Intercontinental Exchange, is also taking action, announcing in January that it would launch a tokenization platform for 24/7 trading and instant settlement of stocks and exchange-traded funds with a blockchain post-trade system.

Related: Liquidity, not novelty, determines tokenization’s value

However, the IMF said legal challenges present another obstacle, stating that without legal clarity over ownership records and settlement finality, tokenized markets risk being “fragmented and peripheral.”

The crypto industry has been developing solutions to address this problem, such as the Ethereum ecosystem’s ERC-3643 permissioned token standard, which ensures that only certain investors have access to tokenized products.

Coinbase Asset Management launched tokenized shares for the Coinbase Bitcoin Yield Fund on Ethereum layer 2 Base on March 20, with the help of financial services firm Apex Group, which implemented the ERC-3643 standard to ensure that token holder identity and eligibility were checked for compliance.

Magazine: Big Questions: Can Bitcoin save you from the dreaded Cantillon Effect?

Source: CoinTelegraph