IMF flags risks of tokenization despite promises of cheaper markets
IMF warns tokenization could worsen sudden market crashes and trigger a “domino effect,” despite promises of faster and cheaper markets, ultimately forcing government intervention.
Economists who have only recently begun studying market tokenization highlight benefits such as reducing intermediary chains, lowering transaction costs, and saving resources. However, the IMF — which has been examining the issue for years — warns of significant risks.
According to IMF senior economist Itai Agur, the nature of tokenized markets enables chains of programs to stack on top of each other, creating opportunities for exponential failure. For this reason, the IMF cautions that tokenization could aggravate sudden market crashes, which would inevitably lead to government intervention.
Another risk is the potential emergence of numerous markets whose tokens may not be interoperable, resulting in increased fragmentation. Such fragmentation could undermine tokenization’s promises of faster and cheaper trading.
Additionally, while programmability of tokenized assets makes it easier to build complex financial products, regulators may not fully understand the inherent risks until it is too late. Agur noted that a similar problem occurred during the 2008–2009 financial crisis, when the programmability of tokenized assets made it difficult for regulators to track emerging risks.
Regulators will have to step in
Despite the risks, the IMF economist also acknowledges the benefits of tokenization, including more convenient asset ownership and potentially faster, cheaper transactions.
Agur noted that tokenization works best when assets and cash flows move smoothly. He added that special policy measures may be necessary to ensure tokenization delivers on its promises while keeping risks contained. Governments have rarely stayed on the sidelines during major monetary-system changes, he added, suggesting that states may take a more active role in the future of tokenization.
As we wrote, IMF updates SNA to reflect crypto AI, and digitalization
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