## Tokenization and Financial Market Inefficiencies

_Fintech Notes, January 29, 2025_

## Source details

**Canonical URL:** [Tokenization and Financial Market Inefficiencies](https://www.imf.org/en/publications/fintech-notes/issues/2025/01/29/tokenization-and-financial-market-inefficiencies-561256)

## Other formats

- [Markdown version](/en/publications/fintech-notes/issues/2025/01/29/tokenization-and-financial-market-inefficiencies-561256/index.md)
- [Structured JSON version](/en/publications/fintech-notes/issues/2025/01/29/tokenization-and-financial-market-inefficiencies-561256/index.json)
- [Bundle manifest](/en/publications/fintech-notes/issues/2025/01/29/tokenization-and-financial-market-inefficiencies-561256/bundle-manifest.json)

## 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

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### 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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## Content in this bundle

- **Tokenization and Financial Market Inefficiencies**
  - [Tokenization and Financial Market Inefficiencies (Markdown version)](/-/media/files/publications/ftn063/2025/english/ftnea2025001.pdf.md){rel="alternate" type="text/markdown"}
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_Source: https://www.imf.org/en/publications/fintech-notes/issues/2025/01/29/tokenization-and-financial-market-inefficiencies-561256_