IMF warns tokenisation will shift financial risk into market plumbing

The International Monetary Fund has warned that tokenisation could reshape financial risk by moving pressure away from individual bank balance sheets and into service providers, market infrastructure and software. In a paper cited by Finextra, the IMF said monetary policy frameworks will need to adjust as settlement, collateral and liquidity processes become faster and more automated.

The fund acknowledged that tokenisation may bring material benefits to markets and payments, including quicker settlement, lower payment costs and assets that can be programmed to follow predefined rules. Its concern is that those gains come with a change in how the financial system is organised and supervised.

In markets built around central databases, sequential processing and delayed settlement, institutions have time to reconcile records, report positions and address operational problems. The IMF said tokenised systems can remove many of those frictions, but also reduce the buffers that slow stress in conventional market structures.

The mechanism is straightforward. If ownership records, transaction rules and settlement instructions are represented in tokenised form, the process can move closer to real time. Smart contracts can trigger collateral movements or other obligations automatically when set conditions are met. That can cut manual work and settlement lag, while also making liquidity calls arise faster than under existing processes.

The IMF said liquidity demands can appear in real time, collateral calls may be automated and failures may spread faster than firms or supervisors can react. It added that risks once absorbed by the balance sheets of institutions behind transactions may become more concentrated in the platforms and code that govern them.

The fund said policy decisions taken now will influence whether tokenisation strengthens financial markets or leaves them more fragmented. For central banks and regulators, that puts the focus on the design of market infrastructure, the treatment of digital settlement assets and the rules governing platforms that may become central to financial activity.

Banks, code and legal certainty

The IMF did not argue that tokenisation will remove banks from the system. Instead, it said the technology could change how banks fund themselves, handle liquidity and carry risk. That assessment places banks inside a redesigned operating model rather than outside it.

Oversight will also need to extend beyond licensed institutions, according to the IMF. As smart contracts take on a larger role in setting and executing transaction rules, supervisors will need to examine the code that enforces those rules, as well as the entities that deploy and manage it.

Legal certainty is another condition for broader adoption. The IMF said market participants need clarity on whether tokenised records represent final ownership, whether settlement finality is recognised in law and which jurisdiction’s rules apply. Without that clarity, the fund said tokenisation is likely to remain fragmented and peripheral.

The paper also identified interoperability between different frameworks and distributed ledgers, code governance, liquidity backstops and the balance between public and private money as key issues for policymakers. The IMF said the preferred outcome would combine public goods, including risk-free settlement assets and aligned international oversight, with features such as interoperability.

This story draws on original reporting from Finextra Research.