IMF Warns Tokenized Finance May Exacerbate Market Instability in Future Crises

IMF Warns of Increased Risk of Financial Crises with Blockchain-Based Trading Infrastructure

The International Monetary Fund (IMF) has published a report warning that moving Wall Street's trading infrastructure onto blockchain-based systems could accelerate financial crises beyond regulators' ability to respond. Despite the technology's promise to cut costs and eliminate settlement delays, the report highlights the potential risks associated with tokenization - the act of representing assets like stocks, bonds, and cash as digital tokens on shared ledgers.

The IMF's report, written by Tobias Adrian, notes that banks, clearing houses, and asset managers, including BlackRock Inc. and JPMorgan Chase & Co., are already running live pilots to test blockchain technology. This technology aims to boost fees by making it easier to trade traditional assets like stocks and bonds. In September, Nasdaq sought approval from the US Securities and Exchange Commission to allow stocks to be tokenized and traded on regulated venues like itself. Earlier this year, the New York Stock Exchange said it's building a venue using blockchain technology to allow for trading tokenized stocks and exchange-traded funds around the clock.

SEC Chairman Paul Atkins has supported tokenization. However, the technology will also allow for trades to move more quickly through the system, which some see as a feature but others consider a vulnerability. According to Adrian, stress events are likely to unfold faster, leaving less time for discretionary intervention. Settlement delays serve as buffers that give central banks and regulators time to intervene during crises.

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In a system that settles instantly and therefore continuously, there's little time for regulators to intervene before margin calls hit. A tokenized system also functions around the clock - but central bank emergency lending facilities were built for business-hour crises. Adrian also compared privately issued stablecoins, increasingly used as settlement assets in tokenized markets, to money-market funds: functional in calm conditions but vulnerable to runs.

The report mapped three scenarios for how tokenized finance develops:

Policies must respond to the structural reallocation of trust and risk that tokenized infrastructures entail, Adrian said. He suggested solutions like anchoring settlement in safe money and clarifying the legal status of tokenized assets. "Achieving this outcome requires policymakers to engage proactively with the structural implications of digital transformation, rather than respond reactively to its manifestations," the report said. "The window for shaping the architecture of the tokenized financial system is open, but it will not remain so indefinitely."

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