The IMF’s Tobias Adrian takes on that question in an intriguing white paper.

Does tokenized finance represent an institutional and operational overhaul even though the securities industry has been focused on the wonders of distributed ledger technology (DLT), a.k.a. blockchains, that undergirds tokenization?

Tobias Adrian, the financial counsellor and director of the monetary and capital markets department of the International Monetary Fund (IMF), makes the case that the shift is much more profound than an IT management adjustment. Adrian is the author of an IMF Notes report, “Tokenized Finance,” issued earlier this month.

“The global financial system is undergoing a transition that is often described as technological but is fundamentally institutional. Tokenization enables financial claims — including money, securities, and derivatives — to be represented as programmable digital tokens recorded on shared ledgers,” Adrian says. “This capability allows for real-time atomic settlement, collapsing multiple stages of the traditional financial value chain into a synchronized process. … Instead, tokenization reconfigures the architecture through which trust, settlement, and risk management are organized.”

Thus, tokenization “is reshaping capital markets by altering how securities are issued, traded, settled, and managed throughout their lifecycle,” Adrian says. “Its significance extends beyond the creation of new instruments to a reorganization of market infrastructure and asset management processes. By embedding ownership, transfer, and compliance directly into programmable tokens on shared ledgers, tokenization compresses trading, settlement, custody, and portfolio management into integrated workflows, with important implications for liquidity, risk allocation, and financial stability.”

“In capital markets, tokenized securities — such as equities, bonds, and fund shares — exist as tokenized and digital representations of real-world assets on shared ledgers. Delivery versus payment can be executed atomically, reducing counterparty risk and operational frictions while increasing transparency over ownership and transaction histories,” he says. “However, the elimination of settlement lags and end-of-day netting shifts liquidity demands from discrete points to continuous real-time.”

Asset managers are seeing how tokenization “affects both asset representation and portfolio operations. Tokenized fund shares and underlying assets allow valuation, compliance checks, corporate actions, and cash flows to be automated through smart contracts, thereby reducing operational complexity and errors. Tokenization also enables finer granularity of ownership, potentially broadening investor access through fractionalization,” Adrian says. “At the same time, programmability can amplify procyclicality. Automated redemption or margin mechanisms, if poorly designed, may accelerate outflows during stress, particularly for open-ended funds holding less liquid assets.”

Another area of major impact is custody and collateral management. “Tokenized securities can be mobilized as collateral in near real time, improving the efficiency of high-quality liquid asset usage across trading, clearing, and funding markets. Although this can ease collateral constraints in normal conditions, it can also accelerate collateral withdrawals and margin calls in stress scenarios, transmitting shocks more rapidly across institutions,” he says.

Governance over post-trade functions will also be getting an overhaul.

“Tokenized asset markets challenge regulatory frameworks built around intermediated, sequential processes. When trading, settlement, custody, and compliance are embedded in code, supervision must extend beyond market participants to the design, governance, and resilience of market infrastructures themselves,” Adrian argues. “Failures can originate in smart contracts, data feeds, or consensus mechanisms, rather than firm balance sheets.”

Oddly enough, tokenization offers “a familiar trade-off in a new form,” Adrian says. “Atomic settlement and enhanced transparency reduce some traditional risks, but speed and automation introduce new vulnerabilities. Stress events are likely to unfold faster, leaving less time for discretionary intervention. Therefore, ensuring stability requires that tokenized asset management remains anchored in safe settlement assets, legally recognized finality, and robust governance arrangements.”

Adrian says his central message “is that technology alone will not determine the outcome. The future of tokenized finance will be shaped by policy choices regarding settlement assets, governance, legal frameworks, and international cooperation. Anchoring innovation in public trust is essential. Without such anchors, tokenization risks amplifying instability, rather than mitigating it.”

But for tokenization to reinforce the financial system with safety, efficiency, and inclusiveness, it will require the best that Old School policymaking can offer.

“Achieving this outcome requires policymakers to engage proactively with the structural implications of digital transformation, rather than respond reactively to its manifestations,” Adrian says. “The window for shaping the architecture of the tokenized financial system is open, but it will not remain so indefinitely.”

The position paper in full can be found here: https://shorturl.at/Kw48K

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