Fintech Notes

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Format: Chicago

Itai Agur, German Villegas Bauer, Tommaso Mancini-Griffoli, Maria Soledad Martinez Peria, and Brandon Tan. "Tokenization and Financial Market Inefficiencies", Fintech Notes 2025, 001 (2025), accessed February 22, 2025, https://doi.org/10.5089/9798400298905.063

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Summary

Most financial assets are digital today. Tomorrow, they may be tokenized. Tokenization implies recording and transferring assets on a widely shared and trusted digital ledger that can be programmed. Interest in tokenization is strong and experiments abound, but what are the consequences of this new trend for financial markets? This note introduces a taxonomy and a conceptual framework centered on market inefficiencies to evaluate this question. Some inefficiencies could decline across the asset life cycle. Others would remain, however, and new ones could emerge. Issuing, servicing, and redeeming assets might involve fewer intermediaries and thus become cheaper. The costs of trading assets may also decrease as tokenization lowers some counterparty risks and search frictions and offers flexibility in settlement. Additionally, greater competition among brokers could lower transaction fees. However, tokenization may amplify shocks if it induces institutions to become more interconnected and hold lower liquidity buffers or higher leverage, potentially jeopardizing financial stability. Programs themselves may introduce new risks related to strings of contingent contracts or faulty code. While competition may grow among financial intermediaries, the provision of market infrastructure could become more concentrated due to network effects.

Subject: Blockchain and DLT, Financial sector policy and analysis, Financial sector stability, Fintech, Smart contracts, Technology

Keywords: Asset lifecycle, Blockchain and DLT, Central banks, Financial markets, Financial sector stability, Fintech, Smart contracts, Tokenization

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