Monetary policy frameworks must adapt to the ongoing development of tokenisation and the likelihood that risk will migrate from banks’ balance sheets to service providers and market infrastructures.
This is the warning that has been issued by the International Monetary Fund (IMF).
While the IMF recognises the transformative impact that tokenisation will have on the investment market and benefits such as faster settlement, cheaper payments and programmable assets, it also warns that the the structure of the financial system itself changes.
The centralised databases and sequential processes that have underpinned securities markets for decades are essentially removed in a tokenised environment. And while this removes friction and time and cost from transactions, it also removes a number of buffers.
“Liquidity demands materialise in real time, collateral calls can be automated, and failures can propagate faster than institutions or supervisors can respond,” states the IMF.
“Risk that once were borne by the balance sheet of individual institutions behind a transaction become increasingly concentrated in the platforms and code that govern these transactions. This shift fundamentally challenges a system built around reconciliations, reporting cycles, and delayed settlement.”
As a consequence, “policy choices made now will shape whether tokenisation strengthens or fragments the financial system”, states the IMF.
The IMF’s paper also clarifies the impact of tokenisation on banks and other market participants that operate as intermediaries in the investment world – that they will not be eliminated but the way they fund themselves, manage liquidity and bear risk.
The role of smart contracts will see the rules governing transactions as increasingly written in code. Effective oversight must therefore extend beyond institutions to the code itself, argues the IMF.
Legal certainty is also critical in a tokenised regime. “Market participants must know whether tokenised records constitute definitive ownership, whether settlement finality is legally recognized, and which jurisdiction’s law applies. Without clarity, tokenisation will remain fragmented and peripheral,” states the IMF.
Other critical concerns for policymakers are the degree of interoperability between different frameworks and distributed ledgers; code governance, liquidity backstops and the role of public and private money.
“The best outcome would be of a system that provides elements of the required public goods such as risk-free settlement assets and internationally aligned oversight, while encouraging and enabling desirable features such as interoperability,” concludes the paper.
