IMF warns tokenized markets could amplify financial risks

The global financial institution found tokenized equity markets less liquid and more volatile than traditional markets, despite growing demand for 24/7 trading. Tokenization could reshape financial markets by making trading and settlement more efficient, but legal uncertainty and risks to financial stability could hinder wider adoption, according to the International Monetary Fund (IMF). In a Thursday >analysis, the IMF said tokenized financial markets are growing rapidly but remain small compared with traditional markets, with poor interoperability and a lack of widely accepted settlement assets among the key obstacles to expansion. The gap between tokenization’s potential and its current scale is evident in trading activity. Tokenized repurchase agreements, or repos, dominate tokenized trading activity, averaging $300 billion to $350 billion in daily transaction volume, compared with roughly $13 trillion traded daily in the broader US repo market. Beyond repos and stablecoins, outstanding tokenized asset value is concentrated in credit products and money market funds. Tokenized real-world assets (RWAs) reached approximately $65 billion in outstanding value as of July, a small fraction of the roughly $300 trillion in global capital-market assets. Tokenized credit accounted for $30.4 billion, followed by money market funds at $17.5 billion, while tokenized equities represented about $2.3 billion. Related: ‘No going back’ for institutions moving toward tokenized onchain future, says Fidelity  Despite their limited scale, tokenized equities are attracting investors seeking around-the-clock trading and fractional ownership. The IMF found that more than half of tokenized equity trading occurred outside regular US market hours, while roughly 80% of trades involved less than one share. The IMF also found that overnight price movements in tokenized equities appeared in traditional stock prices shortly after markets opened, suggesting tokenized markets could provide useful price signals outside regular trading hours. Tokenized equity trading volumes by trading hours and exchange type. Source: >IMF However, the IMF said that tokenized equities were significantly less liquid and exhibited roughly 1.5 times the realized volatility of their traditional counterparts. It warned that as tokenized markets grow, greater interconnectedness and leverage could amplify traditional financial risks, including fire sales, liquidity runs and contagion. The IMF c