What Is Tokenization?

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Money has taken many forms over millennia; digital tokens are presented as the latest evolution.
Tokenization creates assets on a programmable ledger, enabling immediacy in exchanges that replicates the trust properties of physical tokens (e.g., cowries).
Programmability locks buyer’s money and seller’s asset to enable simultaneous exchange and automatic reinvestment of proceeds.

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.
Tokenization can make it simpler for investors to shop around and switch between brokers by allowing data to be transferred among brokers with the click of a button.
Token-ledger payments can be made directly to token holders, automating roles such as registrars (who manage ownership records and transmit dividends or interest).

Assets can be issued directly on the ledger or be representations of assets that exist outside the ledger; in the latter case, an intermediary must hold the represented asset in the background.
Tokenization does not eliminate all middlemen but reshapes the financial industry and reduces the need for certain roles.
Interoperability is critical: if different companies build ledgers that don’t work together, the system could fragment into silos; designing ledgers to “talk to each other” requires planning and coordination.
Policymakers want to make sure that tokenized systems stay open, connected, and stable.

Faster, automated trading has led to sudden crashes, known as “flash crashes,” such as 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 can be riskier and more volatile by making it easier to program and instantly execute automated trading rules.
Programmability enables chains of programs built on top of each other that can act like a programmed set of falling dominoes during a crisis.
Complexity risk: tokenization and programmability make it easier to create complex financial products with risks regulators may not fully understand—paralleling the “complexity bubble” identified by the Financial Crisis Inquiry Report in the 2008–09 crisis.

Debt amplifies shocks because it implies a promise to repay; tokenization can make it easier to build up debt because investors or institutions can use tokens as collateral to borrow and invest elsewhere.
If a token loses value, it could trigger losses across the system through these interconnected borrowing and collateral channels.

Tokenization is extending from financial assets to nonfinancial assets such as real estate and potentially agricultural collateral like farmland and livestock.
Physical assets cannot be fully digitalized; tokenization of nonfinancial assets is best seen as a hybrid between physical and financial technology because physical care is still required to maintain value.

Ensure tokenized systems remain open, connected, and stable through planning and coordination to preserve interoperability.
Monitor and manage the increased speed, complexity, and potential for risky debt that tokenization introduces to avoid amplifying systemic risk.
Recognize that token-ledger designs can automate roles (for example, registrars) and can change competitive dynamics in financial intermediation.
Handle digital tokens with care, balancing the benefits of speed and lower costs against the risks of volatility, complexity, and contagion.

Source: F&D Magazine; ITAI AGUR; September 2025. This article draws on an IMF Fintech Note, “Tokenization and Financial Market Inefficiencies.”