Tokenization could make financial markets faster, cheaper and more efficient, but it may also amplify systemic risks by accelerating financial shocks, concentrating vulnerabilities in a shared digital infrastructure and weakening monetary sovereignty without stronger regulatory safeguards, according to the International Monetary Fund (IMF).

In a recent blog post, the IMF argued that tokenization should be understood as a fundamental redesign of the financial market infrastructure.

Existing financial markets are already digital, but they continue to rely on centralized databases, sequential processing, delayed settlement and reconciliation procedures that intentionally create buffers allowing institutions to manage liquidity, correct operational errors and respond to periods of financial stress.

Tokenization fundamentally alters this model by embedding ownership rights and transfer mechanisms directly into digital tokens recorded on shared ledgers. Smart contracts can automate execution, payment, ownership transfer, collateral management and compliance simultaneously, compressing processes that currently take several days into near-instantaneous transactions.

This increases efficiency, reduces costs and enables programmable financial products, but it also removes many of the safeguards built into today’s financial system, according to the IMF.

The shift could also move systemic risks away from banks and toward the operators of digital platforms, smart contracts and financial market infrastructure.

The fund said policymakers face key decisions over the roles of tokenized bank deposits, stablecoins and central bank digital settlement assets, as well as legal recognition of tokenized ownership, platform interoperability and supervision of critical smart contracts.

It said coordinated international regulation will be necessary to ensure tokenization enhances financial stability rather than contributing to market fragmentation or systemic risk.