IMF Warns Fragmentation Could Undermine Tokenisation’s Promise

Tokenised financial markets are growing rapidly, but fragmented liquidity, legal uncertainty and settlement challenges threaten to limit their potential, according to new IMF research that highlights the challenges this new technology faces.

While the IMF says that tokenisation has the potential to transform financial markets by reducing settlement times, lowering transaction costs and enabling trading around the clock, significant hurdles remain before such benefits can be scaled. According to the IMF, there are four major interdependent factors that are constraining growth: legal certainty, regulatory clarity, interoperability, and safe, sound, and scalable settlement.

At the moment, tokenised markets are expanding rapidly, but they remain small relative to traditional financial markets and are increasingly fragmented across competing platforms and settlement arrangements. The total value of tokenised assets today stands at just below $40bn, up 54% compared with the start of the year.

In terms of activity, repurchase agreements account for the majority of tokenised activity, generating approximately $300 billion to $350 billion in daily transaction volumes, while trading in tokenised assets, including credit, money market funds and equities, contributes another $65 billion. These figures remain modest compared with the approximately $13 trillion traded daily in the US repo market alone.

The IMF identifies interoperability as one of the principal challenges facing the industry. The proliferation of separate blockchain networks, trading venues and settlement systems risks recreating the fragmentation that tokenisation is intended to eliminate.

This has important implications for institutional markets, where the ability to access liquidity across venues, move collateral efficiently and settle transactions reliably is critical.

The research also provides evidence of demand for continuous trading. More than half of the tokenised trading activity examined takes place outside traditional market hours, suggesting that investors value the ability to transact beyond established exchange sessions.

However, the IMF finds that tokenised markets generally remain less liquid and more volatile than their traditional counterparts, with fragmented trading contributing to price discrepancies and less efficient price formation.

For FX markets, the findings raise questions about how tokenised securities and other assets will interact with existing currency trading and settlement infrastructure. As tokenised markets develop, participants will need reliable mechanisms for funding, currency conversion and settlement across different networks, particularly where transactions involve multiple currencies or jurisdictions.

The IMF also cautions that some of the efficiencies promised by tokenisation could introduce new financial stability risks.

Combining trading, clearing and settlement functions on programmable ledgers could eliminate delays and reconciliation processes, but those same processes currently provide institutions with time to manage liquidity, arrange funding and absorb market shocks.

Removing these buffers could accelerate the transmission of financial stress, particularly as tokenised markets become more interconnected and leverage increases.