IMF warns tokenized markets could amplify financial risks

Growth and scale of tokenized markets

Tokenized financial markets are expanding rapidly but remain small compared to traditional markets. The main barriers to growth include poor interoperability between systems and the absence of widely accepted settlement assets.

According to the IMF, daily trading volumes of tokenized repurchase agreements (repos) range from $300 billion to $350 billion, whereas the broader US repo market trades about $13 trillion daily.

Beyond repos and stablecoins, the largest share of tokenized assets is concentrated in credit products and money market funds. As of July, tokenized real-world assets had an outstanding value of approximately $65 billion, a minute fraction of the approximately $300 trillion in global capital market assets. Tokenized credit accounted for $30.4 billion, money market funds $17.5 billion, and tokenized equities around $2.3 billion.

Investors attracted by 24/7 trading amid persisting risks

Tokenized equities are drawing investors interested in round-the-clock trading and fractional ownership. The IMF found that over half of tokenized equity trading occurs outside standard US market hours, with roughly 80% of trades involving less than one share.

The analysis revealed that overnight price movements in tokenized equities tended to appear in traditional stock prices shortly after market openings, suggesting that tokenized markets provide useful price signals beyond regular hours.

However, tokenized equities show significantly lower liquidity and roughly 1.5 times the realized volatility compared to their conventional counterparts. The IMF warned that as tokenized markets grow, increased interconnectedness and leverage could amplify traditional financial risks like fire sales, liquidity shortages, and contagion.

Need for regulatory frameworks and system interoperability

The IMF stresses the importance of clear legal and regulatory frameworks for tokenized financial products, enhanced interoperability between tokenized and traditional financial systems, and safeguards to mitigate emerging vulnerabilities.

Currently, systemic risks remain limited due to the relatively small market share of tokenized assets, but as adoption expands, proper oversight mechanisms become critical.

The IMF has previously expressed concerns: in 2023, warning that automated trading and smart contracts might increase volatility and flash crashes; in April, cautioning that accelerated settlement could heighten financial stress; and in July, highlighting systemic risks stemming from fragmented platforms and insufficient regulatory coordination.

European regulators’ concerns and conclusions

European regulators share similar apprehensions. The European Securities and Markets Authority (ESMA) warned in May that increasing links between crypto and traditional finances, including via tokenized equities, could raise the risk of financial shocks crossing markets.

The IMF authors concluded that although tokenization may transform finance, its future depends more on policies ensuring market depth, trust, and sound safeguards than on technological possibilities alone.