The International Monetary Fund (IMF) has released its third warning of the year regarding the risks associated with tokenization, stating that while tokenized markets are expanding, they remain small and fragmented. The IMF's blog highlights that scaling these markets without clear legal frameworks may heighten risks to financial stability.
Officials at the IMF acknowledge that tokenization has the potential to accelerate transactions, reduce costs, and enhance market accessibility. However, the current state of the market resembles "islands" of liquidity.
According to the report, a significant portion of activity in this segment is driven by repurchase agreements (REPO), with daily trading volumes estimated between $300 billion and $350 billion. Additionally, around $65 billion is traded daily in tokenized assets such as credit instruments, money market funds, and equities.
Source: IMF.For context, the IMF assesses the daily volume of the REPO market in the U.S. at approximately $13 trillion, while global capital markets are valued at around $300 trillion.
The IMF outlined several key conditions necessary for the growth of tokenization, including legal clarity, regulatory transparency, platform interoperability, and secure settlement assets.
It is crucial for investors to understand the rights associated with tokenized assets, and for regulators to grasp how existing regulations apply to new registries and market functions. Without platform compatibility, liquidity pools risk remaining isolated, as noted by the authors of the report.
The IMF also provided insights into the existing market, revealing that over 50% of transactions in the tokenized segment occur outside traditional trading hours, indicating a demand for around-the-clock access.
Approximately 80% of the analyzed trades were for amounts smaller than a single share. However, these markets continue to be relatively illiquid and more volatile than their traditional counterparts, with fragmentation among networks and platforms negatively impacting price formation.
Source: IMF.In a dedicated section, the IMF addressed the risks associated with scaling. The growth of tokenized markets could exacerbate sell-offs, liquidity crises, and contagion due to increased interconnectedness and leverage.
In traditional infrastructure, sequential processes such as messaging, trading, deferred settlements, and reconciliation help reduce costs but also serve as safety buffers. In a fully tokenized environment, some of these buffers may be eliminated.
"Tokenization could still transform the financial system, but its future will depend more on policies that ensure market depth, trust, and reliable guarantees than on technological capabilities," the authors concluded.
This marks at least the third public warning from the IMF regarding tokenization risks this year. In April, the fund indicated that the growth of the RWA segment could transfer crypto risks to traditional markets and accelerate the onset of crises. A July publication discussed the restructuring of the financial architecture while emphasizing the risks posed by a lack of regulation.
It is worth noting that in September, CFTC Chairman Michael Sellig called for preparations for widespread tokenization in the markets.