## Chapter 3 — Scaling Tokenization: new efficiencies, new vulnerabilities

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### Overview: definition, mechanisms, and conditionality
- Tokenization is the representation of financial assets and liabilities on distributed programmable ledgers (DLT).
- By placing functions traditionally performed by separate intermediaries onto a distributed ledger, tokenization can:
  - reduce reconciliation needs;
  - increase transparency; and
  - enable greater automation through smart contracts and composability.
- Benefits depend critically on network effects, market design, and interoperability; both benefits and risks increase as more assets, participants, and settlement instruments are brought onto ledgers.

### Market size, composition, and adoption patterns (key statistics)
- Aggregate and segment values (data as of July 31, 2026):
  - Public market for tokenized real-world assets (RWAs), excluding repos: about $65 billion.
  - Total tokenized asset value noted as $65.10 billion.
  - Private tokenized markets include at least $8 billion in tokenized bonds (cumulative issuance since 2022).
  - Tokenized fixed income (outside repos): about $48 billion.
    - Tokenized credit: $30.4 billion.
    - Tokenized money market funds: $17.5 billion.
  - Tokenized equity markets: $2.3 billion.
  - 30-day average daily volume of tokenized repos: $303 billion.
  - Market size as a percent of outstanding benchmarks:
    - Percent of outstanding US Treasuries: 0.20 percent.
    - Percent of S&P 500 market capitalization: 0.12 percent.
- Issuance and geography:
  - Issuance of tokenized debt securities has scaled since 2022 to about $8 billion cumulative, driven primarily by government and private sector issuers; most transactions mature within five years.
  - Most value originates from issuers in the United States, followed by issuers with undisclosed domiciles and a long tail of smaller financial centers (for example, Liechtenstein and the British Virgin Islands).
- Infrastructure concentration:
  - Activity is concentrated on a handful of key blockchain networks and platforms (leading networks include Ethereum, Solana, Avalanche, Stellar, BNB Chain, XRP Ledger; leading platforms include Bridgetower, Circle, Securitize, Justoken, Ondo, Tether Holdings).
  - Many smaller networks and platforms remain weakly interoperable.

### Empirical findings on emerging benefits and market behavior
- Tokenized equity market sample and scope:
  - Sample covers the five most liquid tokenized US equities across two issuers and their corresponding underlying equity on traditional markets.
  - Sample covers 11 trading venues across centralized and decentralized networks, representing approximately $345 million in reported market value, or about 15 percent of the $2.3 billion tokenized equity market.
  - Data set covers 365 trading days and more than 2 million observations of price and volume fluctuations during five-minute intervals.
  - Holder count: about 930,000 investors (unique on-chain addresses holding a nonzero token balance as of July 31, 2026).
- Key market-behavior findings:
  - Trading hours and fractionalization:
    - More than 50 percent of tokenized equity trading occurs outside regular US market hours (24/7 trading).
    - About 80 percent of tokenized equity trades are executed in sizes below one share.
  - Price information transmission:
    - Overnight on-chain returns contain information relevant for underlying traditional equities; regressions estimate a pass-through coefficient measuring absorption of overnight on-chain information five minutes after market open (a coefficient of 1 implies full absorption).
  - Liquidity and volatility:
    - Tokenized equity markets are currently less liquid, more volatile, and more fragmented than traditional equity markets.
    - Realized volatility is approximately 1.5 times higher for tokenized equities.
    - Amihud illiquidity comparisons show traditional markets most liquid, centralized exchanges materially less liquid, and decentralized exchanges least liquid by a wide margin.
  - Price alignment:
    - Despite higher volatility and lower liquidity, tokenized equities generally remain closely aligned with traditional market prices; venues with higher median daily volume per token track traditional prices more closely.
- Empirical caveat:
  - Findings are preliminary and should be interpreted with caution given the incipient nature of the market.

### Benefits: current, emerging, and potential
- Current (operational; already materializing):
  - Lower issuance costs (empirical evidence, e.g., underwriting fees of tokenized bonds lower than traditional bonds in Hong Kong SAR).
  - 24/7 trading and greater transparency.
  - Cost efficiency and minimized counterparty risk via delivery-versus-payment on common ledgers.
  - Improved transparency and lower reconciliation costs due to a shared, auditable record.
- Emerging (unlocked as tokenization scales and infrastructure adapts):
  - Fractionalization broadening investor access to traditionally illiquid instruments.
  - On-chain price signals that improve pricing.
  - Collateral mobility across venues and strengthened counterparty risk management via programmability.
  - Shorter settlement cycles and automated corporate actions reducing manual processing risk.
- Potential (depend on further growth and scaling):
  - Programmable logic enabling tailored financial products and contingent payoffs.
  - Enhanced access and deeper markets from broader participation.
  - Automated/programmatic margining and programmable settlement.
  - Real-time or near real-time reporting enabling continuous supervision and monitoring.
- Caveat: Many claimed benefits overlap with broader digitalization and can be achieved with conventional technologies; distinct potential arises from combining assets, payments, and programmability on shared platforms.

### Key constraints to scaling tokenized markets
- Four interdependent constraints must be addressed:
  - Legal certainty:
    - Need clear legal rights over tokens and underlying assets, recognition of on-ledger transfers and settlement finality, enforceability of smart contracts, and clarity on custodians’ responsibilities.
    - Cross-border differences in property laws and conflict-of-law rules can create uncertainty over ownership, jurisdiction, and enforceability.
  - Regulatory clarity:
    - Apply principle “same activity, same risk, same regulatory outcome” with a technology-neutral, look-through approach.
    - Frictions mainly arise at clearing, settlement, and reporting ends of the asset life cycle and around DLT-specific features.
  - Interoperability:
    - Benefits and risks scale with convergence on common standards and settlement arrangements rather than fragmentation into many isolated platforms; siloed private permissioned networks can trap liquidity and reduce secondary market depth.
  - Availability of safe, sound, and scalable settlement assets:
    - Settlement in central bank money (traditional or tokenized) or private alternatives such as tokenized deposits and stablecoins has systemic risk implications; tokenized securities should be settled in safe and widely accepted forms of money to support broader adoption.

### Financial stability risks, channels, and amplification mechanisms
- Core risk types elevated by tokenization:
  - Operational and governance risks from distributed technologies, smart contracts, oracles, and code-based execution.
  - Infrastructure and concentration risks from validators, interoperability arrangements, cloud providers, and tokenization platforms.
  - Traditional risks amplified: liquidity risks, interconnectedness, and leverage.
- Novel vulnerability channels:
  - Atomic settlement, collateral reuse, and potential procyclical deleveraging effects.
  - Concentration of off-chain data provision (price feeds, corporate actions, collateral information) by single providers.
  - Fragmentation across chains and platforms combined with concentration on a few key providers.
- Informational alignment:
  - Estimates of informational alignment between traditional and tokenized markets range from 87 percent to 99 percent, suggesting similar responses to common information sets.
- Amplification examples from framework:
  - Programmability and composability can both mitigate operational/legal uncertainty and amplify procyclicality, contagion, and smart-contract vulnerabilities.
  - Atomicity reduces counterparty risk but increases dependency on underlying infrastructure and removes temporal buffers that absorb operational disruptions.

### Supervisory, market-integrity, and operational policy implications
- Supervision and monitoring:
  - Intensify monitoring and mitigation of operational, governance, and infrastructure risks.
  - Adapt supervision to operational and cyber risks of distributed networks; assess network design, degree of decentralization, and reliance on bridges and oracles.
  - Develop a systemwide map of DLT networks and interoperability arrangements to identify concentration risks and critical dependencies.
  - Establish robust third-party risk and outsourcing frameworks; require business continuity arrangements, smart contract audits, and resilient on- and off-chain data management.
  - Require robust reconciliation between on- and off-chain records and clear legal recognition of the authoritative ownership record.
- AML/CFT and supervisory capacity:
  - Strengthen AML/CFT frameworks in tokenized environments, including customer due diligence and beneficial ownership transparency.
  - Build supervisory skills in custody, smart contracts, intraday liquidity, third-party dependencies, and tokenized exposure reporting; domestic and cross-border supervisory cooperation will be important.
  - Blockchain analytics providers can be part of monitoring toolkits.
- Intraday liquidity, circuit breakers, and crisis management:
  - Atomic settlement increases prefunding and intraday liquidity needs; authorities should ensure liquidity risk frameworks and intraday monitoring keep pace.
  - Design circuit breakers, trading halts, liquidity fences, redemption gates, fees, and continuous margining appropriate for always-on DLT infrastructure.
  - Monitor collateral reuse and consider limits or haircuts on reuse of tokenized collateral to avoid self-reinforcing liquidations.
- Market-structure considerations:
  - Tokenization may not eliminate intermediaries such as custodians, CSDs, and CCPs; accountability, governance, and legal responsibility remain necessary.
  - Multiple ledger proliferation increases reliance on bridges and interoperability mechanisms, raising operational fragility; concentration on a few dominant networks could reduce some risks but concentrate influence and systemic exposure.
- Settlement-asset policy:
  - Support development of settlement assets underpinned by central bank money that is interoperable with existing forms or issued directly on-chain (tokenized reserves).
  - Ensure private settlement infrastructures mitigate issuer credit and liquidity risks and align with PFMI and prudential standards.
  - Consider whether FMIs may need access to central bank liquidity facilities under stressed conditions.
  - Promote interoperability efforts with robust standards and risk-management frameworks to preserve cyber and operational resilience.

### Market evolution scenarios and policy-relevant pathways
- Niche tokenization (current trajectory / fragmented equilibrium):
  - Tokenization largely confined to specific use cases (tokenized repos, collateral management, tokenized money market funds, selected sovereign bond issuances).
  - Platforms concentrated on private permissioned networks; trading and settlement rely heavily on traditional infrastructure.
  - Legal certainty often missing across jurisdictions; regulatory treatment differs substantially.
  - Outcome: limited systemic risk but also limited marketwide efficiency gains.
- Institutional plumbing adoption (medium-term):
  - Tokenization embedded in repo markets, collateral management, securities servicing, and cash management on permissioned networks operated by banks, custodians, exchanges, and FMIs.
  - Benefits: reduced reconciliation costs, mobilized collateral, shortened settlement timelines, automated post-trade functions; gains arise from optimizing existing market structures and may not require universal interoperability.
- Broad tokenization (optimistic, high-adoption):
  - Preconditions: legal clarity + interoperability + CeBM settlement.
  - Outcome: tokenized sovereign bonds, equities, deposits, money market instruments on interconnected networks governed by common standards; settlement in central bank money; liquidity moving seamlessly across platforms; collateral mobilized in real time; deeper secondary markets.
  - Trade-off: highest benefits but higher systemic risk; many high-efficiency features can also amplify vulnerabilities.

### Empirical and jurisdictional illustrations
- Tokenized repo and dealer balance-sheet considerations:
  - DLT can boost repo market efficiency through collateral mobility and intraday settlement, but atomic gross bilateral settlement can increase balance-sheet and liquidity needs and require prefunding; programmable batching and central clearing may preserve netting efficiencies.
  - Empirical pattern: intraday repo is negligible in the US noncleared, bilateral repo market segment (data: July 1, 2025, through March 31, 2026).
- Hong Kong SAR experience with tokenized government bonds:
  - Cumulative issuance: about US$2.2 billion.
  - 2023 pilot: platform-based pilot; settlement on a T+1 basis via simultaneous exchange of securities and platform-specific cash tokens; pilot exposed platform participation “islands.”
  - 2024 issuance: dual-access model allowed direct or indirect participation; expanded to four currencies; reached HK$6 billion equivalent.
  - 2025 issuance: introduced option to settle using tokenized central bank money (e-HKD and e-CNY) alongside traditional rails.
  - Key implication: tokenized issuance alone delivers limited market value unless connected with existing market infrastructure; deep secondary markets require sufficient issuance volume and broader investor participation.

### Policy recommendations (summary)
- Adopt a technology-neutral approach that removes unnecessary constraints while safeguarding financial stability.
- To remove unnecessary constraints:
  - Ensure legislation provides legal certainty for tokenized assets (rights, issuance, transfer, redemption, insolvency treatment, enforcement, jurisdiction, conflict-of-law).
  - Provide regulatory clarity through consistent implementation of “same activity, same risk, same regulatory outcome”; use policy sandboxes to inform regulatory drafting where appropriate.
  - Promote interoperability across networks while safeguarding resilience; support common standards for asset representation and messaging.
  - Ensure tokenized securities are settled in safe and widely accepted forms of money (including supporting tokenized central bank money or interoperable central bank settlement).
- To safeguard financial stability as tokenization scales:
  - Intensify monitoring and mitigation of operational, governance, and infrastructure risks.
  - Assess and manage liquidity implications of atomic settlement, collateral reuse, and procyclical deleveraging.
  - Design circuit breakers and liquidity safeguards for tokenized trading environments.
  - Strengthen monitoring of linkages between tokenized and traditional financial markets; adapt crisis-management and resolution frameworks where needed.

*International Monetary Fund, Global Financial Stability Report, October 2026 — Chapter 3.*

### Chapter 3 at a Glance

### Chapter 3 at a Glance

### Overview: What tokenization is and how it can reshape markets
- Tokenization is the representation of financial assets and liabilities on distributed programmable ledgers (DLT).
- By placing functions traditionally performed by separate intermediaries onto a distributed ledger, tokenization can:
  - reduce reconciliation needs;
  - increase transparency; and
  - enable greater automation through smart contracts and composability.
- Benefits depend critically on network effects, market design, and interoperability; both benefits and risks increase as more assets, participants, and settlement instruments are brought onto ledgers.

### Empirical findings on emerging benefits and market behavior
- Evidence from tokenized equity markets shows:
  - 24/7 trading;
  - fractional ownership; and
  - preliminary indications that on-chain prices contain relevant information for traditional markets.
- Because tokenized equity markets are small, they are currently:
  - less liquid;
  - more volatile; and
  - more fragmented than traditional equity markets.
- Empirical findings are preliminary and should be interpreted with caution given the incipient nature of the market.

### Market size, composition, and adoption patterns (key statistics)
- Public market for tokenized real-world assets (RWAs), excluding repos, has reached about $65 billion.
- Private tokenized markets include at least $8 billion in tokenized bonds.
- The 30-day average daily volume of tokenized repos reached $303 billion.
- Tokenized fixed income (outside repos) is about $48 billion.
  - Within that, tokenized credit accounted for $30.4 billion.
  - Tokenized money market funds are about $17.5 billion.
- Tokenized equity markets are estimated at $2.3 billion.
- Total tokenized asset value noted as $65.10 billion; size of the market as a percent of outstanding US Treasuries and the S&P 500 market capitalization is 0.20 percent and 0.12 percent, respectively.
- Data timing: Data as of July 31, 2026.
- Issuance of tokenized debt securities has scaled since 2022 to about $8 billion cumulative, driven primarily by government and private sector issuers; most transactions mature within five years.
- Geographic concentration:
  - Most value originates from issuers in the United States, followed by issuers with undisclosed domiciles and a long tail of smaller financial centers (for example, Liechtenstein and the British Virgin Islands).
- Market structure and infrastructure:
  - Activity is concentrated on a handful of key blockchain networks and platforms, while many smaller networks and platforms remain weakly interoperable.
  - Tokenized repo prominence reflects early use cases for collateral management and collateral mobility, though tokenized repo volumes remain small relative to traditional repo markets and are largely concentrated among affiliated entities.

### Key constraints to scaling tokenized markets
- Four interdependent constraints must be addressed for future growth:
  - Legal certainty:
    - Need clear legal rights over tokens and underlying assets, recognition of on-ledger transfers and settlement finality, enforceability of smart contracts, and clarity on custodians’ responsibilities.
    - Cross-border differences in property laws and conflict-of-law rules can create uncertainty over ownership, jurisdiction, and enforceability.
  - Regulatory clarity:
    - Application of the principle “same activity, same risk, same regulatory outcome” with a technology-neutral, look-through approach.
    - Frictions mainly arise at the back end of the asset life cycle—clearing, settlement, and reporting—and around DLT-specific features.
  - Interoperability:
    - Benefits and risks scale with convergence on common standards and settlement arrangements rather than fragmentation into many isolated platforms.
  - Availability of safe, sound, and scalable settlement assets:
    - Tokenized securities should be settled in safe and widely accepted forms of money to support broader adoption.

### Risks and implications for financial stability
- Tokenization can elevate technology and infrastructure risks and create new channels that amplify traditional vulnerabilities:
  - Liquidity risks;
  - Interconnectedness; and
  - Leverage.
- Novel channels of vulnerability include:
  - Atomic settlement, collateral reuse, and potential procyclical deleveraging effects;
  - Concentration of off-chain data provision (for example, price feeds, corporate actions, collateral information) by single providers;
  - Fragmentation across chains and platforms combined with concentration on a few key providers.
- Current systemic risks remain limited given market size, but the central financial stability question is whether market infrastructure, legal foundations, liquidity arrangements, and risk controls would be adequate if tokenization achieves broader adoption.

### Policy implications and recommendations
- Adopt a technology-neutral approach that removes unnecessary constraints while safeguarding financial stability.
- To remove unnecessary constraints to tokenization:
  - ensure that legislation provides legal certainty for tokenized assets;
  - provide regulatory clarity through consistent implementation of the principle “same activity, same risk, same regulatory outcome,” and create policy sandboxes to inform regulatory drafting;
  - promote interoperability across networks while safeguarding resilience; and
  - ensure that tokenized securities are settled in safe and widely accepted forms of money.
- To safeguard financial stability as tokenization scales:
  - intensify monitoring and mitigation of operational, governance, and infrastructure risks;
  - assess and manage the liquidity implications of atomic settlement, collateral reuse, and procyclical deleveraging;
  - design circuit breakers and liquidity safeguards for tokenized trading environments; and
  - strengthen monitoring of linkages between tokenized and traditional financial markets.

*International Monetary Fund, Global Financial Stability Report, October 2026 — Chapter 3.*

### 1. Issuance of Tokenized Bonds, by Country2. Issuance of Tokenized Bonds over Time

### 1. Issuance of Tokenized Bonds, by Country2. Issuance of Tokenized Bonds over Time

### Concentration in Market Infrastructure
- Tokenized assets are concentrated across a handful of leading blockchain networks and platforms; leading networks listed include Ethereum, Solana, Avalanche, Stellar, BNB Chain, XRP Ledger, and other networks. Leading platforms listed include Bridgetower, Circle, Securitize, Justoken, Ondo, Tether Holdings, and other platforms.
- Note on measurement: a blockchain network refers to the protocol-based ledger technology; a blockchain platform refers to a specific provider offering services on top of one or several blockchain networks.
- The dataset excludes tokenized repurchase agreements and stablecoins; the Figure Technologies HELOC token is excluded to prevent a single asset from driving results.
- Inclusion of stablecoins would make Tether account for more than half of platform asset value and Circle for less than one quarter.

### Key Constraints to Tokenized Market Adoption
- Legal certainty:
  - Need for clearly defined legal rights and claims over tokens, assets, and settlement, including their treatment in insolvency and enforcement actions.
- Interoperability:
  - Protocol and network consolidation across permissioned and permissionless systems is limited; siloed private permissioned networks can trap liquidity and reduce secondary market depth.
- Safe, sound, and scalable settlement:
  - Settlement in central bank money (traditional or tokenized) or in private alternatives such as tokenized deposits and stablecoins, both with systemic risk implications.
  - Tokenized trading without a trusted cash leg may increase settlement risk and limit delivery-versus-payment, end-to-end programmability, and full realization of tokenization benefits.
- Regulatory clarity:
  - Greater regulatory clarity through testing and cross-border collaboration is needed; inconsistent rules across economies could create unnecessary complexity unless regulatory approaches are more coordinated globally.
- Coordination problem:
  - Low liquidity discourages participation by the investors who could deepen markets (Agur and Copestake 2025), so scaling depends on greater interoperability, common standards across instruments, and support for interoperable settlement assets.

### Settlement and Financial Stability Implications
- Safe, sound, and scalable settlement arrangements are required; definitions:
  - Safety refers to the risk profile of assets.
  - Soundness refers to an FMI’s conduct and operations.
  - Scalability refers to the ability for FMIs to support transactions at scale.
- Emerging private settlement assets introduce credit and liquidity risk into settlement processes unless such risks are properly mitigated by issuers and FMIs.
- The choice of settlement asset affects interconnectedness with other asset classes (for example, sovereign bonds) and institutions (for example, banks and money market funds).
- Enabling settlement in safe and widely accepted forms of money could attract a broader set of investors by providing clarity on the stability of on- and off-ramp transactions.

### Current, Emerging, and Potential Benefits of Tokenization
- Current benefits (operational; already materializing):
  - Lower issuance costs (empirical evidence exists; e.g., Leung and others (2023) find underwriting fees of tokenized bonds were lower than those of traditional bonds in Hong Kong SAR).
  - 24/7 trading and greater transparency.
  - Cost efficiency and minimized counterparty risk via delivery-versus-payment on common ledgers.
  - Improved transparency and lower reconciliation costs in clearing and servicing due to a shared, auditable record.
- Emerging benefits (unlocked as tokenization scales and infrastructure adapts):
  - Fractionalization broadening investor access to traditionally illiquid instruments.
  - On-chain price signals that improve pricing.
  - Collateral mobility across venues and strengthened counterparty risk management via programmability.
  - Shorter settlement cycles and automated corporate actions (coupons, dividends, redemptions) reducing manual processing risks.
- Potential benefits (depend on further growth and scaling of tokenized assets):
  - Programmable logic enabling tailored financial products and contingent payoffs.
  - Enhanced access and liquidity, deeper markets from broader participation.
  - Automated/programmatic margining and programmable settlement.
  - Real-time or near real-time reporting shifting oversight toward continuous supervision and monitoring.
- Caveat: Many claimed benefits of tokenization overlap with broader digitalization and can be achieved with conventional technologies; tokenization’s distinct potential arises from combining assets, payments, and programmability on shared platforms.

### Empirical Assessment and Market Evidence (Tokenized Equity Markets)
- Sample and scope:
  - Analysis covers the five most liquid tokenized US equities across two issuers and their corresponding underlying equity on traditional markets.
  - Sample covers 11 trading venues across centralized and decentralized networks, representing approximately $345 million in reported market value, or about 15 percent of the $2.3 billion tokenized equity market.
  - Data set covers 365 trading days and more than 2 million observations of price and volume fluctuations during five-minute intervals.
  - Holder count in the analysis comprises about 930,000 investors, representing unique on-chain addresses holding a nonzero token balance as of July 31, 2026.
- Key empirical findings:
  - More than 50 percent of tokenized equity trading occurs outside regular US market hours, indicating 24/7 trading is a source of demand.
  - About 80 percent of tokenized equity trades are executed in sizes below one share, indicating strong demand for fractionalization and a user base dominated by smaller retail-oriented participants rather than institutional investors transacting in large blocks.
  - Tokenized equity overnight on-chain returns contain information relevant for underlying traditional equities: regressions estimate a pass-through coefficient by regressing each underlying equity’s cumulative return over the first five minutes of the US trading session on the overnight return of its tokenized counterpart; a coefficient of 1 implies full absorption of overnight on-chain information five minutes after market open.
- Limitations and interpretation:
  - Findings provide early evidence but should be interpreted with caution given the incipient nature of the market; market structure and operations can change significantly if tokenization scales.
  - Different potential end-state market structures would shape the balance of risks and benefits associated with tokenization.

*Source: International Monetary Fund, Global Financial Stability Report, October 2026.*

### CHAPTER 3 ScalIng TOkenIzaTIOn: new eFFIcIencIeS, new VulnerabIlITIeS

### CHAPTER 3 ScalIng TOkenIzaTIOn: new eFFIcIencIeS, new VulnerabIlITIeS

### Financial stability implications from asset tokenization
- Tokenization may not fundamentally alter the nature of financial stability risks but reshapes channels through which vulnerabilities accumulate and shocks are transmitted.
- Distinctive features and design choices of tokenization increase prominence of technology and infrastructure risks and can create new channels amplifying traditional risks such as liquidity, interconnectedness, and leverage.
- Operational and governance risks are elevated due to distributed technologies, smart contracts, oracles, and code-based execution; market-structure and infrastructure risks rise with validators, interoperability arrangements, cloud providers, and tokenization platforms.
- Estimates of informational alignment between traditional and tokenized markets range from 87 percent to 99 percent, suggesting similar responses to common information sets.
- Key empirical concern today: operational risks and direct-exposure transmission to the traditional financial system are most prominent; as tokenized markets scale, smart contracts, composability, and shared governance could increase financial-sector leverage and liquidity risk and create new critical infrastructure nodes.

### Framework linking tokenization features to risk generation, amplification, and mitigation
- The framework links tokenization features and market-design choices to mechanisms by which risks:
  - emerge directly,
  - are amplified, and
  - are mitigated across the asset life cycle.
- Core insights:
  - Operational and governance risks are the framework’s most direct sources of risk.
  - Traditional risks (fire sales, liquidity runs, contagion, leverage) often operate as amplifiers, emerging more strongly as tokenized assets enter trading, settlement, funding, and collateral-management functions.
  - Trade-offs are pervasive: many features both mitigate and amplify risks.
    - Example: Programmability can lower operational and legal uncertainty but amplify procyclicality and contagion and introduce smart-contract vulnerabilities (Table 3.1, code C2).
    - Example: Composability can improve coordination and capital efficiency but propagate contagion, leverage, and expand the operational attack surface (Table 3.1, code C3).
    - Example: Atomicity reduces counterparty and principal risk but increases dependency on underlying infrastructure and removes temporal buffers that absorb operational disruptions (Table 3.1, code C4 and S2).
- Specific design choices and their roles (as summarized in the framework matrix):
  - DLT-based recordkeeping and transfer: shifts ownership and transfer records to shared distributed ledgers (feature C1).
  - Programmability and automation: embedding rules for issuance, transfer, settlement, collateral use, and corporate actions (feature C2).
  - Collateral mobility and reuse: enabling collateral movement and redeployment across platforms, increasing leverage potential (feature F1).
  - Composability: programmatic interaction of assets and applications, enabling asset reuse and embedding in broader transactions (feature F2).
  - Access model, governance structure, oracle dependence, settlement finality, interoperability, trading hours, and clearing structure are identified as design choices that alter direct, amplification, and mitigation channels for liquidity, contagion, leverage, operational, and infrastructure risks (see Table 3.1 codes I1–I5, T1–T4, S1–S2).

### How traditional risks amplify in tokenized markets
- Liquidity and contagion risks:
  - Automated programmable collateral management can accelerate margin calls and asset liquidations relative to traditional arrangements (Table 3.1, codes C2 and F2).
  - Real-time settlement, 24/7 trading, and automated liquidation mechanisms may increase redemption pressures in tokenized investment vehicles, accelerating liquidity stress and transmitting shocks to tokenized and traditional markets (Table 3.1, codes C2, C4, I1, and T3).
  - Contagion can spread through interoperable platforms, composable applications, and automated collateral-management arrangements that rapidly transmit shocks across markets (Table 3.1, codes T2, C3, and F1).
- Leverage risks:
  - Greater collateral mobility with tokenized repo can facilitate larger leverage positions and amplify deleveraging pressures during stress (Table 3.1, code F1).
  - Tokenized money market funds or tokenized assets used as programmed margin collateral could be reused across multiple transactions, creating collateral chains across interconnected platforms (Table 3.1, codes C3, F1, and F2).
- Supervisory and market-integrity challenges:
  - Supervision may need to expand monitoring across new trading venues, asset classes, and market infrastructures (including smart contracts), challenging resources and expertise.
  - Use of private networks or privacy technologies may limit on-ledger transparency; registering or servicing tokenized assets through offshore jurisdictions can create regulatory, supervisory, or transparency gaps that increase AML/CFT vulnerabilities.

### Empirical evidence: fragmentation, volatility, and liquidity in tokenized equity markets
- Liquidity:
  - Tokenized equity markets are considerably less liquid than traditional markets, especially on decentralized exchanges.
  - Using the Amihud measure (median absolute five-minute price change per $1 billion of daily volume), traditional markets are most liquid, centralized exchanges materially less liquid, and decentralized exchanges least liquid by a wide margin.
  - A given volume of trading currently has a much larger effect on prices in tokenized venues, reflecting shallower liquidity and limited market-making activity.
- Volatility:
  - Tokenized equities exhibit significantly higher volatility than equivalent equities traded in traditional markets.
  - Realized volatility is approximately 1.5 times higher for tokenized equities.
  - Volatility increases from traditional markets to centralized exchanges and is highest on decentralized exchanges, in part because tokenized venues trade continuously and capture lower-volume overnight and weekend price movements.
- Price alignment and dispersion:
  - Despite higher volatility and lower liquidity, tokenized equities generally remain closely aligned with prices in traditional markets.
  - Kernel-density plots of five-minute price spreads during US market hours show peaks close to zero for both centralized and decentralized exchanges, indicating average tracking of underlying equities.
  - The decentralized exchange distribution is flatter and wider than the centralized exchange distribution, indicating larger and more frequent deviations consistent with weaker liquidity.
  - Price alignment is strongly linked to trading activity: venues with higher median daily volume per token tend to track traditional prices more closely; low-volume venues exhibit substantially larger pricing errors.

### Potential scenarios for the evolution of tokenized markets
- Adoption dynamics:
  - Pace and direction of tokenization depend more on participant incentives than on technology.
  - Legal and regulatory frameworks and availability of safe settlement assets are key drivers of adoption.
  - Network effects can produce nonlinear adoption: slow early adoption followed by rapid scaling once critical mass is reached.
- Fragmented equilibrium (current trajectory):
  - Tokenization largely confined to specific use cases achieving immediate efficiency gains without broad market coordination (e.g., tokenized repos, collateral management, tokenized money market funds, selected sovereign bond issuances).
  - Platforms concentrated on private permissioned platforms; trading and settlement continue to rely heavily on traditional infrastructure.
  - Legal certainty often missing across jurisdictions; regulatory treatment differs substantially, creating doubts about ownership rights, custody, insolvency treatment, and cross-border enforceability.
  - Incumbents’ control over proprietary infrastructures can limit incentives for open interoperability, keeping markets siloed.
  - Under continued fragmentation, systemic risks remain limited because adoption is small, but broader efficiency gains—composability, liquidity aggregation, integrated settlement—fail to materialize.
- Path to integration (implied by framework):
  - Scaling requires resolving fragmented regulation, improving interoperability, and identifying suitable settlement assets to reach critical mass and unlock network benefits.

*Source: IMF staff.*

### 1. Amihud Illiquidity Measure

### 1. Amihud Illiquidity Measure

### Market liquidity and volatility
- Amihud illiquidity is defined as the median absolute five-minute price change divided by median daily volume, scaled per $1 trillion for traditional markets (market hours) and per $1 billion for centralized and decentralized exchanges (24/7).
- Measurement details:
  - Volume-weighted venue prices within five-minute bins.
  - Winsorized at the 1st/99th percentile.
  - Require more than one trade per decentralized exchange bin.
  - Report medians.
- Graph annotations and reported comparisons:
  - Amihud axis labels present: "0", "1.00", "0.25", "0.50", "0.75".
  - Right-scale tick labels include: "0", "5", "1", "2", "3", "4".
  - Caption text: "... and 1.5 times more volatile than traditional markets ..."
- Realized volatility:
  - Defined as the median across token-days of the square root of the sum of squared five-minute log returns (Andersen-Bollerslev-Diebold-Labys), in percentage per day.
  - Axis tick labels shown: "0", "2.0", "0.5", "1.0", "1.5".
  - Note: traditional markets cover US market hours; centralized and decentralized exchanges cover all hours (24/7).
  - Statement: "... but still remain closely priced relative to traditional markets."

### Price tracking, spreads, and venue-level deviations
- Spread distribution (tokenized versus traditional):
  - Spread defined as 10,000 × (log volume-weighted average price − log Bloomberg price).
  - Kernel density estimate axis ticks shown: "0", "0.04", "0.01", "0.02", "0.03".
  - Horizontal range annotation: "−100−50050100".
  - Observation: "Higher-volume exchange venues track traditional prices more closely."
- Price deviation by venue volume:
  - Price deviation is each venue's median absolute five-minute deviation from traditional prices (y-axis, log scale) versus median daily volume per token (x-axis, log scale).
  - Bubble sizes represent the average trades per token; trendline is a log-log fit across all venues.
  - Axes and scale annotations include: "100", "10", "20", "50", "0.010.1110100", and "Millions of US dollars" / "Basis points".
- Data sources for all measures: Allium; Bloomberg Finance L.P.; CoinDesk; and IMF staff calculations.

### Scenarios for tokenization adoption
- Current stance: Niche tokenization
  - Drivers: Multiple private networks + fragmented regulation + absence of safe on-chain settlement assets.
  - Outcome: Low adoption, limited systemic risk but also limited marketwide benefits.
- Medium-term scenario: Institutional plumbing adoption
  - Tokenization embedded in repo markets, collateral management, securities servicing, and cash management.
  - Dominant model: Permissioned networks operated by banks, custodians, exchanges, and FMIs.
  - Benefits: Reduce reconciliation costs; mobilize collateral more efficiently; shorten settlement timelines; automate selected post-trade functions.
  - Note: Gains arise from optimizing existing market structures and do not require fully harmonized regulation or universal interoperability.
  - Supporting observation: "In large, high-turnover markets such as government bonds, even small per-trade efficiency gains from tokenization can translate into substantial aggregate benefits when trading is automated on a common platform."
- Optimistic scenario: Broad tokenization
  - Preconditions: Legal clarity + interoperability + CeBM settlement.
  - Outcome: High adoption, highest benefits but higher systemic risk.
  - Features: Tokenized sovereign bonds, equities, deposits, money market instruments on interconnected networks governed by common standards; settlement in central bank money; liquidity moving seamlessly across platforms; collateral mobilized in real time; deeper secondary markets; reduced fragmentation; legal frameworks supporting cross-border trading and issuance.
  - Potential benefits for emerging markets: Lower some issuance costs, broaden investor access, facilitate participation in global capital markets.
  - Risk caveat: Many features that generate the largest efficiency gains can also create new vulnerabilities and amplify existing transmission channels.

### Policy recommendations
- Overarching approach:
  - Adopt a technology-neutral approach that allows different technologies to compete on their merits.
  - Remove unnecessary constraints to tokenization while safeguarding financial stability.
  - Assure legal certainty and improve regulatory clarity; focus on operational, governance, and infrastructure risks; upgrade supervisory capacity.
- For emerging markets:
  - Continue fundamental reforms for capital market development alongside tokenization.
  - Advance foundational elements: a broad investor base, benchmark pricing, secondary market liquidity, robust legal and supervisory safeguards.
  - Warning: Building tokenized infrastructure, adapting legal frameworks, and developing supervisory capacity require substantial fixed investments while efficiency gains tend to increase with transaction volumes.
- Promote technology neutrality by removing unnecessary constraints:
  - Legal certainty:
    - Laws should provide clear rights and claims over tokens and define the legal relationship between tokenized assets and their real-world equivalents.
    - Address issuance, transfer, redemption, insolvency treatment, enforcement actions, jurisdictional and conflict-of-law rules in cross-border transactions.
    - Clarify whether tokenized assets confer direct rights over underlying assets or claims against the issuer.
  - Regulatory clarity:
    - Apply existing securities, banking, and payments regulations in the short term consistent with "same activity, same risk, same regulatory outcome."
    - Tokenized securities → securities regulation; tokenized deposits → banking regulation; tokenized payment arrangements → payments regulation.
    - Maintain requirements on issuance, disclosure, transparency, market conduct, corporate governance, best execution, market surveillance, and consumer protection.
    - Medium-term adaptations:
      - Custody: apply client asset rules while considering private key custody and wallet types (hot, cold, warm).
      - Prudential metrics: assess whether reporting frameworks capture intraday exposures associated with tokenized funding and securities markets.
    - Long-term considerations if tokenization scales:
      - Record-keeping, clearing, and settlement require greater regulatory review.
      - Public permissionless networks may provide probabilistic technical finality versus PFMIs' requirements for clear and final settlement for designated FMIs.
      - Smart contracts may challenge clearing frameworks designed around intermediaries and require reconsideration of netting, atomicity, and risk-allocation assumptions.
    - Use of policy sandboxes:
      - Financial sector authorities with resources and expertise can use sandboxes to identify regulatory constraints and assess whether existing rules need adaptation.
      - Effective sandboxes should have clear objectives, realistic timelines, and a transparent process for translating lessons into reforms.
      - Note: Not all authorities should or could build sandboxes; those with limited resources can learn from pilots in more advanced jurisdictions.
  - Interoperability:
    - Ensure no unnecessary inhibitors to developing interoperability across networks while safeguarding resilience.
    - Authorities, in collaboration with other relevant bodies and market participants, should support development of common standards for asset representation and messaging along with resilient arrangements to prevent fragmented tokenization silos.
    - International coordination is required to prevent diverging national approaches, reduce global regulatory arbitrage, and avoid further fragmentation of tokenized markets.
    - Role for international organizations and standard-setting bodies in coordinating clarity in line with their mandates.

*Sources: Allium; Bloomberg Finance L.P.; CoinDesk; and IMF staff calculations; International Monetary Fund.*

### CHAPTER 3 ScalIng TOkenIzaTIOn: new eFFIcIencIeS, new VulnerabIlITIeS

### CHAPTER 3 Scaling Tokenization: new efficiencies, new vulnerabilities

### Safe, sound, and scalable settlement
- All securities settlement systems are systemic and must comply with the risk-management expectations set out in the PFMIs; securities are settled using central bank money in wholesale capital markets where practical and available.
- Without an interoperable form of central bank money, private settlement assets—tokenized deposits or stablecoins—could become the preferred settlement instruments for capital market transactions, introducing credit and liquidity risks associated with their issuer.
- In tokenized capital markets, stress affecting one counterparty may be transmitted more rapidly to a financial market infrastructure (FMI) if the FMI lacks adequate risk-management controls.
- Concentration risk can rise where one private settlement asset becomes the preferred settlement asset on a platform, increasing an FMI’s exposure to that issuer.
- Policy recommendations:
  - Support development of settlement assets underpinned by central bank money that is either interoperable with existing forms of central bank money or issued directly on-chain (tokenized reserves).
  - Ensure private settlement infrastructures conducting settlement with commercial bank money mitigate risks carefully, aligning with the PFMIs and prudential standards.
  - Consider whether certain FMIs may eventually require access not only to central bank money for settlement but also to central bank liquidity facilities under stressed conditions.
  - Efforts to promote interoperability (bridges, oracles, message layers, cross-network connections) should be accompanied by robust standards and risk-management frameworks to avoid eroding cyber and operational resilience.

### Safeguarding financial stability: operational, governance, and infrastructure risks
- Authorities should intensify monitoring and mitigation of operational, governance, and infrastructure risks as tokenized markets grow.
- Supervisory actions and frameworks:
  - Adapt supervision to the operational and cyber risks of distributed networks, including assessment of network design, degree of decentralization, and reliance on interoperability solutions such as bridges and oracles.
  - Develop a systemwide map of DLT networks and interoperability arrangements to identify concentration risks, critical dependencies, and potential channels of contagion.
  - Establish robust third-party risk and outsourcing frameworks so regulated entities remain accountable for operational and cyber risks in line with PFMI expectations; safeguards include business continuity arrangements, smart contract audits, and resilient on- and off-chain data management.
  - Require robust reconciliation between on- and off-chain records, clear legal recognition of the authoritative record of ownership, and resilience standards consistent with the PFMIs for settlement infrastructure.
  - Consider adapting bank resolution frameworks to address the transfer of tokenized assets during resolution if tokenized markets grow.

### Supervisory capacity and AML/CFT
- Supervisors need skills, tools, and resources in custody, smart contracts, intraday liquidity, third-party dependencies, privacy technologies, and tokenized exposure reporting.
- Supervisors must identify new channels of market abuse; domestic and cross-border supervisory cooperation will be increasingly important given resource constraints.
- Blockchain analytics providers could be one tool in a broader monitoring toolkit.
- Authorities should ensure anti-money laundering/combating the financing of terrorism (AML/CFT) frameworks remain effective in tokenized environments, including effective customer due diligence measures, beneficial ownership transparency, and cross-border supervision.

### Liquidity runs, fire sale risk, and intraday liquidity
- Atomic settlement reduces counterparty risk but can increase intraday liquidity needs by requiring prefunding and eliminating timing gaps that traditionally absorb liquidity shocks.
- Financial sector authorities should ensure liquidity risk frameworks, including intraday liquidity monitoring and supervisory requirements, keep pace with adoption of atomic and near-instant settlement arrangements.
- Financial institutions should maintain sufficient liquidity buffers to meet prefunding obligations under stress without resorting to fire sales.
- Authorities should strengthen intraday and out-of-hours liquidity monitoring and stress testing, incorporating tokenization-specific disruptions such as smart contract failures and trading suspensions.

### Interconnectedness, contagion, and deleveraging risk
- Tokenized infrastructure can support continuous trading and near-instant execution natively, which can amplify price volatility and fire sales during stress if safeguards are absent.
- Authorities should examine and potentially adapt tools such as circuit breakers, trading halts, liquidity fences, redemption gates and fees, and continuous margining for always-on DLT infrastructure.
- Crisis-management arrangements may need enhancement for continuous monitoring, expanded operational readiness, and intervention tools adapted to always-on financial markets.
- Monitor linkages between tokenized and traditional markets so stress in tokenized markets (for example, redemption pressures in tokenized money market funds) does not spill over undetected into core funding and securities markets.
- Monitor collateral reuse and procyclical deleveraging: greater collateral reuse can lengthen collateral chains and amplify deleveraging pressures during stress.
  - Financial sector authorities should monitor collateral velocity and reuse, consider limits or haircuts on reuse of tokenized collateral, and ensure automated margining does not trigger simultaneous, self-reinforcing liquidations across interconnected protocols.

### Market structure and intermediation
- Tokenization could structurally change financial infrastructure and organization of services but may not eliminate the need for intermediaries such as custodians, central securities depositories, and central counterparties.
- Tokenization may allow some functions to be provided more independently on shared platforms, encouraging competition, but many activities will still require governance, legal accountability, risk management, and regulatory oversight.
- Possible market configurations:
  - Single shared platform where all parties transact could reduce intermediaries and maximize programmability and reduced operational friction, but would create concentration risks and require common governance arrangements.
  - Emergence of multiple ledgers and networks serving different markets and assets may prevail in the medium term; this increases need for coordination layers (bridges, oracle services) and can fragment liquidity.
- Trade-offs:
  - As ledger count rises, reliance on bridges and interoperability mechanisms increases operational fragility.
  - Concentration in a small number of dominant networks could reduce some operational and cyber risks but concentrate influence over market rules, pricing, and access; entities legally responsible for critical FMI functions remain required.

### Tokenized repos and broker-dealer balance sheets (Box 3.2)
- DLT is seen as boosting repo market efficiency through improved collateral mobility and intraday settlement, with potential benefits for dealer balance sheet capacity.
- Intraday repo can allow transactions to be settled with greater precision, including on an intraday basis and over weekends, enabling dealers to shorten time a position occupies balance sheet capacity.
- Much of current balance sheet efficiency comes from netting rather than settlement speed; shorter settlement cycles can reduce bilateral netting opportunities.
- Pure DLT environments tend toward gross, atomic, bilateral settlement, which can increase balance sheet and liquidity needs and require prefunding.
- If transactions increasingly settle outside CCPs, multilateral netting benefits may decline; whether netting efficiencies are preserved depends on whether central clearing remains integral.
- Programmable batching via smart contracts can restore netting efficiencies at the cost of settlement speed; evidence from equity trading suggests substantial netting efficiencies may be preserved with settlement windows as short as one hour when combined with central clearing (McLaughlin 2023).
- Empirical patterns:
  - Data (United States) from July 1, 2025, through March 31, 2026, show intraday repo is negligible in the US noncleared, bilateral repo market segment.
  - Federal Reserve daylight overdrafts have dwindled considerably since the global financial crisis; average daily outstanding values are reported for the July 1, 2025, through March 31, 2026 timeframe.

### Jurisdictional experience: Hong Kong SAR tokenized government bonds
- Hong Kong SAR cumulative issuance of tokenized government bonds is about US$2.2 billion.
- Sequenced transition:
  - 2023 issuance: pilot to test legal and operational feasibility; tokenized through Goldman Sachs’s Digital Asset Platform; Central Moneymarkets Unit (CMU) of the Hong Kong Monetary Authority handled clearing and settlement; investors received digital tokens representing beneficial interests; settlement on a T+1 basis through simultaneous exchange of securities and platform-specific cash tokens representing a claim for fiat in Hong Kong dollars against the Hong Kong Monetary Authority; pilot exposed a limitation that investors or their custodians had to join the platform, creating “islands” disconnected from broader market infrastructure.
  - 2024 issuance: introduced a dual-access model allowing direct participation through the DLT platform or indirect participation through CMU and external linkages including Euroclear and Clearstream; transaction expanded to four currencies and reached HK$6 billion equivalent in issuance size; first on-chain native bond issuance for the Government of Hong Kong SAR.
  - 2025 issuance: scaled the model further and introduced the option, for the Hong Kong dollar and renminbi tranches, to settle using tokenized central bank money (in the form of e-HKD and e-CNY) alongside traditional settlement rails.
- Implications and constraints from Hong Kong SAR experience:
  - Bond tokenization delivers limited market value if implemented as a standalone technology layer; digital platforms need to connect with existing market infrastructure to achieve scalability.
  - Deep and liquid secondary markets require more than tokenized issuance alone: sufficient issuance volume, broader investor participation, and trading conditions comparable with conventional bond markets.

*Source: International Monetary Fund, Global Financial Stability Report, CHAPTER 3 Scaling Tokenization: new efficiencies, new vulnerabilities (October 2026).*

### Box 3.3. Selected Experiences in Hong Kong SAR with Building a Tokenized Bond

### Box 3.3. Selected Experiences in Hong Kong SAR with Building a Tokenized Bond Market through Iterative Infrastructure Development

### Glossary
- anti-money laundering  
  Laws, regulations, and controls designed to prevent money laundering.
- bridge  
  A mechanism that enables interoperability by connecting two or more dis- tributed ledgers, allowing for the transfer of information and assets between them while preserving the integrity and consistency of those assets.
- combating the financing of terrorism  
  Measures to detect and prevent terrorist financing.
- composability  
  The ability of tokenized assets, liabilities, smart contracts, and protocols to be combined and reused across applications.
- D LT  
  Distributed ledger technology, a shared database in which multiple partici- pants maintain synchronized records without a single central administrator. Data can be shared or distributed to varying degrees, and control of those data can be decentralized to varying degrees.
- oracle  
  A system that securely supplies and verifies off-chain real-world data (for example, macroeconomic data) on-chain.
- platform  
  A software infrastructure provider that creates, issues, manages, and tracks tokens.
- RWA  
  Off-chain assets—such as bonds, funds, real estate, and commodities—repre- sented on a digital ledger as tokens.
- tokenized reserves  
  A form of central bank reserves represented—“tokenized”—or natively issued on distributed ledger technology. Sometimes used interchangeably with wholesale central bank digital currency.
- TradFi  
  TradFi (traditional finance) refers to regulated financial markets and services whose core business models are not predicated on distributed ledgers. This includes most banks, payment and remittance providers, insurers, investment firms, pension funds, and others.

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2026/october/english/ch3.pdf_