Tokenization and Financial Market Inefficiencies
Fintech Notes, January 29, 2025
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- Tokenization and Financial Market Inefficiencies
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Bibliographic details
- Authors: Itai Agur, Germán Villegas-Bauer, Tommaso Mancini-Griffoli, Maria Soledad Martinez Peria
- Published: January 29, 2025
- Series: Fintech Notes
- DOI: https://doi.org/10.5089/9798400298905.063
Overview
- Tokenization: recording and transferring assets on a widely shared and trusted digital ledger that can be programmed.
- Purpose of the note: introduces a taxonomy and a conceptual framework centered on market inefficiencies to evaluate consequences of tokenization for financial markets.
- Scope: discusses how inefficiencies might change across the asset life cycle, which inefficiencies could persist, and what new inefficiencies could emerge.
Key findings on market frictions and costs
- Issuing, servicing, and redeeming assets might involve fewer intermediaries and thus become cheaper.
- Trading costs may decrease because tokenization:
- Lowers some counterparty risks.
- Reduces search frictions.
- Offers flexibility in settlement.
- Greater competition among brokers could lower transaction fees.
- Some inefficiencies would remain; new inefficiencies could appear.
Financial stability and systemic risks
- Tokenization may amplify shocks if it induces institutions to:
- Become more interconnected.
- Hold lower liquidity buffers.
- Hold higher leverage.
- Programs (tokenization arrangements) may introduce new risks related to:
- Strings of contingent contracts.
- Faulty code.
Market structure implications
- Competition may grow among financial intermediaries.
- Provision of market infrastructure could become more concentrated due to network effects.
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- Tokenization and Financial Market Inefficiencies