The effect of tokenization on financial stability is unclear.
The International Monetary Fund has described tokenization as having the potential to eliminate misunderstandings and increase transparency in finance, but warned that the technology could pose challenges to financial stability.
“Tokenization's impact on financial stability is uncertain,” the IMF said in a 23-page report on Thursday, adding that “tokenization and improved transparency reduce some traditional risks, but speed and automation introduce new features.”
More than $27.6 billion worth of real-world assets, minus Stalkcoins, are currently exchanged onchain, according to data from RWA.xyz. Boston Consulting Group Estimated in 2022, the token market could grow to $16 trillion by 2030, while McKinsey & Co predicted a more conservative $2 trillion by 2024.
The IMF acknowledged that tokenization would expand how securities and other financial products are issued, traded, organized and managed, but said it would shift risks from the banking system to shared ledgers and smart contract codes.
“Stress events in dynamic markets occur more quickly than in traditional systems, leaving time for discretionary intervention.”
The agency said it offered opportunities in emerging markets such as fast cross-border payments and financial inclusion, but said “volatile capital flows, rapid currency substitution and the erosion of monetary sovereignty increase the risk.”
Wall Street advocates for tokenization
Blockchain tokenization has been pushed by Wall Street leaders like Larry Fink, CEO of BlackRock, among those seeking to tokenize everything from stocks and bonds to money market funds and real estate.
The largest RWA tokenization platform locked in by total value is Securitization — the tokenization platform behind BlackRock's USD Institutional Digital Liquidity Fund — at $3.38 billion, according to CryptoDep, citing data from April 1.
Tether Gold and Ondo Finance are close behind with $3.35 billion and $3.21 billion respectively.
New York Stock Exchange parent Intercontinental Exchange is taking action by announcing in January that it will launch a token platform for 24/7 trading and instant booking of stocks and exchange-traded funds via a blockchain-based post-trade system.
Related: Liquidity, not novelty, determines token value
However, the IMF notes that legal challenges pose another obstacle, with legal transparency on ownership records and finalization of settlements, signaling markets can become “fragmented and interconnected”.
The crypto industry has been developing solutions to address this problem, such as the Ethereum ecosystem's ERC-3643 permissioned token standard, which ensures that only certain investors can access tokenized products.
Coinbase Asset Management tokenized shares for the Coinbase Bitcoin Product Fund on March 20, according to Ethereum layer 2, with the help of the financial services firm Apex Group, implemented the ERC-3643 standard to ensure compliance with the identity and eligibility of the token holder.
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