Driving the enthusiasm around tokenization is the expectation of faster settlement, lower costs, broader access. However, a recent note by the International Monetary Fund (IMF), titled “Tokenized Finance,” written by Tobias Adrian, offers a more measured and structurally grounded perspective. It argues that tokenization is not simply a technical upgrade to existing systems, but a fundamental reorganisation of how trust, risk, and settlement work in finance. The note’s critiques are not arguments against tokenization but a roadmap for getting it right.
More Than a Tech Story
Previous waves of financial digitization saw the movement from paper to electronic records, from phone to online trading – improving efficiency without changing the underlying architecture. Tokenization does something different. By representing financial assets as programmable tokens on shared ledgers, it collapses what were once sequential, institution-dependent processes into a single, automated workflow. Settlement that once took days can happen in seconds. Compliance rules can be embedded directly into the asset itself. Risk management can be executed by code rather than by a back-office team.
The IMF note frames this as a structural reallocation of trust – away from regulated intermediaries and toward shared infrastructure and programmable logic. The efficiency gains are real, but the new vulnerabilities this shift creates also deserves attention.
The Speed Problem
Traditional financial systems have built-in friction, and not all of it is wasteful. Settlement lags, end-of-day netting, and batch processing are inefficient, but they also create time for institutions to respond to stress — to net exposures, mobilise liquidity, and intervene before a problem becomes a crisis. Tokenized systems eliminate these buffers by design.
In a fully tokenized environment, settlement is continuous, margining is automated, and liquidity demands arise in real time. A faulty data feed or a poorly coded smart contract can trigger cascading liquidations before any human authority has had a chance to respond. The note makes clear that this arises from the inherent design feature of the system that regulators must now build around.
The Central Bank Challenge
Central banks face a particularly acute version of this problem. Their liquidity tools, like lending facilities and overnight windows, are built around the business day. A 24/7 tokenized financial system requires backstops that can operate at machine speed on tokenized infrastructure, which raises hard questions about access and governance, and moral hazard that existing frameworks may not yet be equipped to answer.
The Money Question
At the centre of the note is a question that sounds simple but is structurally profound: what is money in a tokenized system, and who provides it?
In traditional markets, central bank money is the ultimate settlement asset. It anchors the entire system’s convertibility and preserves what economists call the “singleness of money”- the principle that a rupee held anywhere in the system is worth exactly a rupee everywhere else. Tokenization opens up this question by allowing a broader range of digital assets to serve as settlement instruments, including regulated stablecoins and tokenized bank deposits.
The Limits of Stablecoins
The IMF note is candid about the limits of stablecoins in this role. Even fully backed stablecoins depend not just on the quality of their reserves, but on the operational capacity of their issuers and the liquidity of underlying markets in a stress scenario. In that sense, they resemble money market funds more than central bank money, and in a stress scenario, that resemblance carries real consequences for the broader financial system.
The note highlights the “synthetic CBDC” model, where private issuers hold central bank reserves as full backing for their tokens, as a more relatively stable institutional arrangement, combining private sector innovation with public sector trust.
The Fragmentation Risk
One of the note’s most important warnings concerns fragmentation. Tokenized finance is unlikely to consolidate onto a single global platform. In practice, multiple platforms operated by different institutions and jurisdictions will coexist, each with its own settlement assets, liquidity pools, and governance arrangements. Without common interoperability standards, this creates digital silos: liquidity trapped on one platform that cannot easily flow to another, cross-border transactions that lack legal finality, and a crisis management architecture that has no clear jurisdiction.
The IMF is explicit: fragmentation in tokenized finance can be as dangerous as excessive concentration. And for emerging economies in particular, including India, the risks are amplified. Dollar-denominated stablecoins circulating on global platforms could accelerate currency substitution and undermine monetary sovereignty faster than any traditional capital flow dynamic.
What Comes Next
The note outlines five policy priorities: anchoring settlement in safe money, applying consistent global regulatory standards, ensuring legal certainty for tokenized assets, promoting interoperability across platforms, and adapting liquidity and crisis management frameworks for a continuous, automated environment.
The IMF’s framing is important: tokenization is a technological enabler, not a determinant of outcomes. The architecture of the tokenized financial system will be shaped by policy choices made now, not by the technology itself. The window for making those choices well, the note warns, is open but it will not remain so indefinitely.