## Tokens Are Finance’s Newest and Oldest Innovation

## Source details

**Canonical URL:** [Tokens Are Finance’s Newest and Oldest Innovation](https://www.imf.org/-/media/files/publications/fandd/article/2025/09/b2b.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/fandd/article/2025/09/b2b.pdf.md)
- [Structured JSON version](/-/media/files/publications/fandd/article/2025/09/b2b.pdf.json)

---

### Background: immediacy, settlement risk, and programmability
- Cash provides immediate finality: when you pay with a banknote, the deal is done—no delays.
- Digital transactions use intermediaries (banks, credit card networks) that approve and settle later, taking on settlement risk.
- Settlement delays matter for financial markets where time is money; J.P. Morgan estimates that asset management costs could be cut by about a fifth if the settlement of trades and the reinvestment of sale proceeds were immediate.
- Programmability (code that locks and exchanges buyer’s money and seller’s asset at the same moment) can reproduce the immediacy of physical tokens in the digital realm and enable automatic reinvestment of proceeds.

### Digital intermediaries and tokenization
- Tokenization: creates assets on a programmable ledger; assets can be issued directly on the ledger or represent off-ledger assets (for which an intermediary must still hold the represented asset).
- Token ledgers can:
  - Automate roles such as registrars that manage ownership records and transmit payments (dividends, interest) by making such payments directly to token holders.
  - Lower frictions when switching brokers by enabling data transfer among brokers with a click, reducing reliance on specialized clearinghouses or costly sell-and-repurchase strategies.
- Tokenization reshapes the financial industry and reduces the need for certain intermediary roles, but does not eliminate all middlemen.
- Interoperability risk: if different companies build ledgers that do not work together, the financial system could fragment into silos; designing ledgers that can talk to each other requires planning and coordination.
- Policymaker aim: ensure tokenized systems stay open, connected, and stable.

### Risks and instability: flash crashes, complexity, and debt amplification
- Faster, automated trading can increase frequency and severity of sudden crashes (“flash crashes”); example: the 2010 Wall Street flash crash when an estimated $1 trillion was briefly wiped off the value of stocks listed on the exchange.
- Tokenized markets enable easier programming and instant execution of automated trading rules, increasing potential volatility and risk.
- Chain reactions: financial crises can unfold like falling dominoes; on token ledgers, chains of programs layered on top of each other can act like a programmed set of falling dominoes during a crisis.
- Complexity risk: programmability makes it easier to create complex financial products whose risks regulators may not fully understand until too late. The Financial Crisis Inquiry Report concluded that a “complexity bubble” burst at the same time as the real estate bubble, stating: “The securities almost no one understood, backed by mortgages no lender would have signed 20 years earlier, were the first dominoes to fall in the financial sector.”
- Debt amplification: tokenization can facilitate using tokens as collateral to borrow and invest elsewhere; if a token loses value, that failure can trigger losses across the system because debt implies promises to repay.

### Hybrid technology: tokenizing nonfinancial assets
- Trend: financial assets evolved from paper records to digital ledgers and programmable tokens; tokenization is expanding to nonfinancial assets such as real estate and potentially agricultural collateral like farmland and livestock.
- Physical limits: physical assets cannot be fully digitalized; they still require physical care (e.g., a farmer tending cattle) to maintain value.
- Tokenization of nonfinancial assets is best viewed as a hybrid between physical and financial technology.

### Summary findings and guidance
- Findings:
  - Tokenization offers clear rewards by speeding transactions and lowering trading costs.
  - Tokenization increases speed, complexity, and the potential for risky debt—factors that have contributed to past financial crises.
- Guidance for handling innovation:
  - Design token ledgers for interoperability to avoid fragmentation into silos.
  - Anticipate and monitor automated trading behaviors to mitigate flash-crash–type risks.
  - Strengthen regulatory understanding of programmable, complex financial products before risks materialize.
  - Recognize hybrid limits when tokenizing physical assets and ensure custodial and maintenance arrangements preserve underlying value.

*This article draws on an IMF Fintech Note, “Tokenization and Financial Market Inefficiencies.”*

---


_Source: https://www.imf.org/-/media/files/publications/fandd/article/2025/09/b2b.pdf_