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IMF Flags Volatility and Systemic Risks in Tokenized Markets Along with IOSCO

Finance Magnates

Cryptocoins News / Finance Magnates 13 hours ago 6 Views

The International Monetary Fund published an explanatory video on X today examining tokenized markets, outlining potential advantages while also cautioning about risks.

Crypto tokens linked to traditional financial assets may pose new risks for investors, the global securities regulator IOSCO warned. The organization noted that while most risks are covered by existing frameworks, the underlying technology could introduce additional vulnerabilities.

Differences in token structures can create uncertainty over asset ownership, and third-party issuers may add counterparty risk. “Tokenization could also suffer from potential spill-over effects from increased inter-linkages with the crypto asset markets,” IOSCO added.

Advantages Highlighted by IMF

“Tokenization can make financial markets faster and cheaper, but efficiencies from new technologies often come with new risks,” the IMF video said. It explained that tokenization allows assets to be “faster and cheaper to buy, own, and sell” by reducing reliance on intermediaries such as clearinghouses and registrars.

Researchers studying early tokenized markets have reportedly “found significant cost savings,” the IMF shared, noting that programmable platforms can enable near‑instant settlement and more efficient use of collateral.

Risks and Market Volatility

However, the fund cautioned that these same efficiencies can heighten familiar dangers. Automated trading has “already led to sudden market plunges known as flash crashes,” and tokenized markets with instantly executed trades “can be more volatile” than traditional venues.

In stressed conditions, complex chains of smart contracts “written on top of each other” may interact “like falling dominoes,” potentially turning local problems into systemic shocks.

Fragmentation and Liquidity Concerns

The video also highlighted the risk of fragmentation if multiple tokenized platforms emerge that “don’t speak to each other,” which could weaken liquidity and undermine the promise of faster, cheaper markets. Governments’ involvement in the evolution of money was another focus.

“Governments have rarely been content to stay on the sidelines during important evolutions of money,” the video pointed out, adding that history suggests they are likely to take “a more active role in the future of tokenization.”

Tokenization as Mainstream Policy Issue

The video signals a shift in the IMF’s approach to tokenization. While the fund has researched tokenized market structures and digital money for years, presenting its findings in a public-facing video indicates that tokenization is increasingly seen as a mainstream policy issue.

Tokenized markets have grown into a multibillion-dollar industry. Major players include BlackRock’s BUIDL fund, which has become the world’s largest tokenized Treasury fund, surpassing Franklin Templeton’s Franklin OnChain US Government Money Fund, and expanding through 2024 and 2025.

The IMF’s video emphasized that these markets will continue to develop under close regulatory scrutiny, with governments ready to intervene if needed.

This article was written by Tareq Sikder at www.financemagnates.com.
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