IMF Working Papers

Competing broker initiatives to “tokenize” financial assets—i.e., represent them on programmable platforms—promise efficiency gains but raise concerns about market fragmentation. Policymakers in several countries are considering supporting such platforms or mandating their interoperability. We provide the first formal framework for analyzing optimal policy in this context. Brokers with heterogeneous market power compete to attract investors and execute their trades intra-broker or on a legacy platform. Coalitions of brokers can invest in creating a tokenized market with faster, cheaper inter-broker settlement. Partial coalitions divert trades away from excluded competitors, leading to equilibrium coalition structures that can feature excessive investment or insufficient tokenization. Neither public-private cost-sharing nor interoperability mandates are sufficient to achieve the social optimum when used alone, but their combination is. These results withstand incorporating an open-access ledger (e.g., a public blockchain).