The International Monetary Fund (IMF) has warned that the rapid development of tokenised finance could either strengthen the global financial system or create new sources of instability, depending on the policy decisions taken by governments and regulators.
Tokenisation is more than a technological upgrade, the IMF said, arguing that moving financial assets and liabilities onto shared digital ledgers could fundamentally alter how markets operate, how risks are distributed and how authorities supervise the financial system.
The IMF said tokenisation is often presented as a way to deliver faster settlements, cheaper payments and programmable assets, but its impact could extend much further by changing the underlying architecture of finance.
When financial instruments move onto shared digital platforms, processes that currently happen separately, including execution, clearing and settlement, could take place simultaneously through software rather than traditional institutional systems.
The IMF warned that while this could improve efficiency, it could also shift risks away from banks and investment funds towards companies operating digital platforms and market infrastructures.
“Policy choices made now will shape whether tokenisation strengthens or fragments the financial system,” the IMF said, adding that further research was examining new trends in payments, asset tokenisation and the future development of financial market infrastructures.
The fund explained that existing financial systems have been digital for decades, but most continue to rely on centralised databases and sequential processes.
Currently, transactions involve instructions being transmitted, trades being matched, settlements being deliberately delayed and reconciliations being completed afterwards.
These delays create costs and inefficiencies, but they also provide safeguards by allowing institutions time to intervene during periods of stress, correct mistakes and manage liquidity.
Tokenisation changes this model by embedding ownership and transfer mechanisms directly into the asset itself.
Through smart contracts, tokenised assets can be traded, ownership can be transferred and payments can be completed simultaneously on shared ledgers.
The IMF said processes that previously required days of clearing and reconciliation could potentially be completed within moments.
However, the removal of these delays also removes some of the buffers built into traditional finance.
The IMF warned that liquidity pressures could emerge instantly, collateral demands could be automated and failures could spread faster than institutions or regulators can respond.
Risks that were previously contained within the balance sheets of individual institutions could increasingly become concentrated in the platforms and software controlling transactions.
The fund said this represents a major challenge for a financial system built around reporting cycles, reconciliations and delayed settlements.
A key issue raised by the IMF is the future role of settlement assets, traditionally dominated by central bank money through reserves held by financial institutions.
Tokenisation allows multiple forms of digital money to circulate on shared ledgers, creating new choices for how financial transactions are settled.
The IMF identified three emerging forms of digital settlement assets.
Tokenised bank deposits represent digital versions of existing commercial bank liabilities and would continue to operate within existing regulatory frameworks.
The IMF said programmable features could allow simultaneous settlement and improve liquidity management, but continuous settlement could reduce banks’ ability to respond to unexpected events, increasing the importance of real-time liquidity support.
Stablecoins provide another option by offering programmability and global reach, but their reliability depends on maintaining a one-to-one value relationship with other forms of money.
The IMF said this depends on the quality of reserves backing stablecoins, market liquidity and the resilience of issuers, adding that even fully backed stablecoins have faced challenges during periods of market stress.
Tokenised central bank reserves would remove credit risk from the settlement asset itself, but would require central banks to operate or closely supervise new programmable infrastructures.
The IMF said this would extend the role of central banks beyond traditional payment systems and create important decisions over how much functionality should be provided through public platforms and how much should remain with private companies.
The fund stressed that banks are unlikely to disappear as a result of tokenisation but will instead undergo significant changes in how they operate.
Tokenised deposits could combine payments, customer settlements and treasury activities on shared ledgers, while tokenised lending could embed processes such as interest calculations and collateral requirements into smart contracts.
The IMF said continuous risk monitoring could improve enforcement and allow problems to be addressed more quickly.
Capital markets could also be transformed, with tokenised securities potentially combining issuance, trading, settlement, custody and compliance processes into integrated systems.
While this could reduce counterparty risks, it could also create continuous liquidity demands.
Automated redemptions and margin requirements could improve efficiency during normal conditions but may accelerate market stress during periods of disruption.
The IMF said collateral markets could become among the earliest beneficiaries, as high-quality assets could be moved more quickly across platforms.
However, it warned that if digital infrastructure becomes the central point of market activity, failures in governance could become systemic events.
The fund also highlighted the risks created by concentration.
Permissioned shared ledgers could improve efficiency and liquidity by consolidating activity on fewer platforms, but this would increase the importance of operational resilience, cybersecurity and crisis management.
Interoperability between different platforms will also be essential, as fragmented systems could trap liquidity and recreate risks in new forms.
The IMF said continuous, 24-hour settlement would challenge traditional central bank and market practices designed around business-day cycles.
Liquidity support mechanisms may need to operate directly within tokenised infrastructures and at the speed of automated systems, raising difficult questions about access, control and potential moral hazard.
As financial rules increasingly move into software, the IMF said regulators will need to oversee not only institutions but also the code governing transactions.
Critical smart contracts could become too important to fail, requiring levels of oversight similar to those applied to systemically important financial institutions.
Legal certainty will also be essential, with market participants needing clear answers over whether tokenised records represent definitive ownership, whether settlements have legal finality and which jurisdiction’s laws apply.
Without clear legal foundations, the IMF said tokenisation risks remaining fragmented and limited in scope.
For emerging and developing economies, the technology could offer major benefits, including faster cross-border payments, improved access to markets and more efficient settlement systems.
However, the IMF warned that risks could be equally significant.
Tokenised assets and money can move internationally almost instantly, potentially bypassing existing safeguards that slow capital movements and provide policymakers with time to react.
The fund warned that rapid capital flows, currency substitution and weakened monetary sovereignty could become greater risks, particularly if privately issued global stablecoins become dominant payment methods.
The IMF said strong domestic regulatory frameworks remain the first line of defence, but international cooperation will be necessary to ensure tokenisation supports financial inclusion and stability rather than undermining them.
The future of tokenised finance will depend on decisions surrounding the role of public and private money, interoperability between systems, legal frameworks, governance of digital code and liquidity support mechanisms.
The IMF said the preferred outcome would be a financial system that combines public safeguards, including risk-free settlement assets and internationally coordinated oversight, with private sector innovation and greater interoperability.
Leave a comment