IMF warns tokenized assets could amplify liquidity risks, calls for stronger oversight

Asset tokenization lowers transaction costs and speeds up settlement, but could trigger liquidity shocks in times of crisis, the International Monetary Fund warned Thursday.

Tokenization refers to the recording of financial assets or liabilities on a blockchain-based distributed ledger.

The IMF released a report titled "Expansion of Tokenization: New Efficiencies and Vulnerabilities" at a joint event with the Bank of Korea held Thursday afternoon. The report was included as a standalone chapter in the IMF's Global Financial Stability Report. The IMF publishes the GFSR twice a year to assess risks and vulnerabilities in the global financial system.

The report found that as tokenization spreads, dependence on operational infrastructure deepens and traditional risks such as leverage and liquidity can be amplified through new channels. While systemic risks from tokenization remain limited at present, the report said that if it becomes widespread, financial market infrastructure, legal frameworks and liquidity management could emerge as central challenges to financial stability.

The tokenized real-world asset market reached approximately $65 billion as of July this year. Of that, bonds and money market funds accounted for roughly $48 billion, making up the bulk of the market. Tokenized equities totaled only about $2.3 billion.

An analysis of the US tokenized equity market found that more than half of all trading volume occurred outside regular trading hours, easing time-based constraints. About 80 percent of trades were executed in fractional units of less than one share, broadening access for retail investors, the report added. More than 87 percent of price movements in the tokenized market immediately after regular trading hours were subsequently reflected in traditional equity market prices.

Empirical analysis of the US tokenized market showed lower liquidity and higher volatility compared with traditional markets. Volatility in the tokenized market was roughly 1.5 times that of traditional markets. Within the tokenized market itself, decentralized exchanges showed a more pronounced liquidity decline than centralized ones.

The report warned that automated collateral management, around-the-clock trading and automatic liquidation could accelerate margin calls and liquidations, heightening liquidity risk under stress conditions. It also raised concerns that increased movement and reuse of collateral through tokenized repurchase agreements and money market funds could expand leverage and intensify deleveraging pressure during market stress. Interoperable platforms and composable applications could also rapidly spread shocks across markets and infrastructure, the report said.

On the policy front, the report recommended securing legal certainty over token rights and claims; applying the "same activity, same risk, same regulation" principle and making use of regulatory sandboxes; supporting interoperability across platforms; and backing the use of central bank money for securities settlement.

For financial stability, the report called for strengthening governance frameworks for third-party technology providers; monitoring intraday and after-hours liquidity and conducting stress tests; reviewing the effectiveness of existing safeguards such as circuit breakers; and enhancing monitoring of linkages with traditional markets.