IMF Warns Tokenization Could Reshape Global Finance as New Blockchain Risks Replace Banks

Key Takeaways:

• The IMF believes that the introduction of tokenization may alter the financial system as we know it today.
• The potential risks can transition from banks to smart tokens and blockchain infrastructure.
• Policymakers have just one thing to do in order to prevent broken and tokenized markets.

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The International Monetary Fund (IMF) is asserting that tokenization isn’t just another innovation on blockchain but a structural change in the world of global finance. The institution believes transitioning financial assets to shared digital ledgers could enhance efficiencies but also adds new risk that demands new regulatory frameworks, according to a new blog post.

Today’s financial markets continue to function through a series of steps including trading, clearing, and settlement, says the IMF. That’s not the case with tokenization, as it adds ownership and settlement directly into digital assets with smart contracts.

This enables transactions to settle close to real time (rather than days) which lowers the costs of the operation and makes asset transfers easier. IMF sees tokenization as the technology to modernize payments, securities trading and collateral management, making financial markets faster and more programmable.

The organization cautions, though, that removing settlement delays obliterates vital safety buffers, too. Liquidities demands might occur right now, and transactional liquidity could exacerbate stress quicker than institutions react.

Read More: Citi Predicts $5.5 Trillion Tokenization Boom

The IMF feels that the adoption of tokens doesn’t mean the elimination of the banks, but banks have to evolve.

Tokenized deposits can enhance the payment efficiency, and tokenised lending precludes interest computation, management of collateral, and risk controls from taking place outside of smart contracts. The capital markets could also benefit from increased issuance and trading speed, speed of settlement, and custody.

Three key digital settlement assets in tokenized finance stood out according to the IMF, namely tokenized bank deposits, stablecoins, and tokenized central bank reserves.

They each have their pros and cons. While tokenized deposits stay within existing banking, Stablecoins offer world wide access and programmable payments. Central bank-issued tokenized money removes credit risk but would require central banks to operate more advanced digital infrastructure.

Rather than favoring one model, the IMF says policymakers must carefully determine how public and private forms of digital money should coexist.

Read More: SEC Eyes Tokenized Stocks Plan That Could Unlock Trillions in Crypto Trading Markets

Policy choices today will determine the impact of tokenization on the financial system’s unity versus its fragmentation, the IMF says.

In addition to financial firms, the world of smart contracts, blockchain infrastructure, interoperability standards and the definition of the legal nature of tokenized assets must also be regulated, says the organization.

The report also points to other areas where emerging markets could be facing risks, as tokenization of assets and sharing in foreign stablecoins could increase cross-border capital movements and reduce the capacity for monetary control.

Moving forward, coordinated international regulation will be key to ensure that tokenization creates no new systemic risk so it can help increase efficiency, the IMF believes.

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