The IMF highlights hidden risks as tokenization wipes out traditional financial reserves

Without the public infrastructure to support token financing, the IMF warns, it could amplify instability through several compounding forces.

The International Monetary Fund (IMF) has warned that although the adoption of token finance brings many efficiency and speed benefits, some of its features may also introduce financial instability to markets.

Tokenized real-world assets (RWAs) also continue to grow rapidly, with the industry worth approximately $27.5 billion as of early April.

Coding risks

In a note dated April 1, Tobias Adrian, a financial adviser to the International Monetary Fund, said: He says The inefficiencies that markets try to eliminate through tokenization are actually the shock absorbers that prevent the global economy from collapsing.

The paper argues that tokenization is actually a “structural transformation of the financial architecture” rather than an efficiency improvement. This is because it eliminates the “time barriers” in traditional finance by allowing transactions to be settled instantly.

Tokenization changes how people transfer assets such as money, stocks, and bonds by automating these processes via smart contracts on the blockchain. This reduces settlement delays by allowing banks to clear ownership and transactions almost instantly.

“These frictions are not only costly to end investors, but they also provide temporary barriers that allow exposures to be liquidated, liquidity to be mobilized, and authorities to intervene before settlement becomes final. Token systems reduce or eliminate these barriers.”

However, Adrian argues that removing these delays could actually mean eliminating our safety nets. This is because the settlement window usually gives banks time to manage liquidity and risk exposure. It also leaves room for regulators to monitor and intervene if anything happens.

The International Monetary Fund has identified three main hidden risks that could accompany the removal of these financial reserves. One major concern is liquidity pressure. According to the paper, tokenization could result in financial institutions needing to always have the funds needed to meet requirements for instant transaction settlements.

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Other risks relate to cross-border governance and oversight. Since coding relies on smart contracts for automation, there is less room for human access when things go wrong. This could lead to greater consequences during events such as price drops, especially if a smart contract error results in automatic liquidations.

Additionally, regulators only have authority within their borders, while tokenized assets can easily move across multiple countries. This, in turn, makes it difficult for them to solve problems in the event of a crisis.

Find a common anchor

In its report, the IMF also acknowledges the advantages that come from using this technology. For example, asset managers and investors benefit from the efficiency that comes from lower costs, speed, and transparent transactions.

However, the paper argues that for tokenization to be successful, it must be built on public trust, which it argues can be achieved through the use of secure settlement assets such as wholesale central bank digital currencies (wCBDCs).

According to Adrian, if we do not implement these broad measures, tokenization could amplify financial instability through speed, concentration, and fragmentation.

Meanwhile, the tokenization industry has seen a lot of growth recently, with data from RWA.xyz showing that currently, the value of tokenized assets represented on the blockchain is around $27.6 billion. Previous research was also conducted by Boston Consulting Group anticipation The sector will become a $16 trillion industry by 2030.