- Tokenization Can Change the World’s Financial Architecture
Tokenization is often described as a technological upgrade enabling faster settlement, cheaper payments, and programmable assets. But it is a lot more. When financial assets and liabilities move onto shared digital ledgers, the structure of the financial system itself changes. Processes that today occur sequentially — execution, clearing, settlement —can now happen simultaneously, governed by software rather than institutional processes. Risk could migrate away from the balance sheets of institutions such as banks and investment funds towards the companies managing services and market infrastructures. The potential points of failure could change, so the policy frameworks must adapt accordingly.
Our research shows that policy choices made now will shape whether tokenization strengthens or fragments the financial system. Additional work goes deeper into new trends in payments and asset tokenization and how financial market infrastructures will evolve in a tokenized economy.
What really changes?
Payments, securities, and derivatives have been digital for decades, but they still run on centralized databases and sequential processes. Instructions are transmitted, trades are matched, settlements are delayed on purpose, and reconciliation follows. These frictions add cost and time but provide buffers, safety, and liquidity management, by allowing time for intervention in moments of stress or errors.
Tokenization goes a step beyond simple digitization by embedding ownership and transfer directly within the asset itself. When a tokenized asset changes hands, smart contracts can execute trades, transfer ownership, and move payments simultaneously — all on a shared ledger. Processes that once required days of clearing and reconciliation are now completed in moments.
Frictions disappear — but so do buffers. Liquidity demands materialize in real time, collateral calls can be automated, and failures can propagate faster than institutions or supervisors can respond. 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.
Settlement in a tokenized world
Every financial system depends on a core settlement asset. Traditionally, that role has belonged to central bank money — in particular, the risk-free reserves that financial institutions hold at the central bank. Tokenization reopens this question by enabling multiple forms of digital money to circulate on shared ledgers. Three forms are emerging.
Tokenized bank deposits are a new digital representation of an existing liability — the commercial bank deposit — and inherit its regulatory and institutional framework. Programmability enables atomic (simultaneous) settlement and more efficient liquidity management. But continuous settlement reduces banks’ ability to react to unforeseen circumstances, heightening the importance of real-time liquidity backstops.
Stablecoins offer programmability and global reach, but they rest on a promise: par convertibility with other forms of money. Maintaining that parity depends on reserve quality, market liquidity, and issuer resilience — and even fully backed stablecoins have been vulnerable under stress.
Tokenized central bank reserves eliminate credit risk in the settlement asset itself. But they require central banks to operate — or closely govern — new programmable infrastructures, extending their operational role well beyond traditional payment systems. How much functionality to embed in public platforms, and how much to leave to the private sector, remains an open and consequential design choice.
Banks will change, not disappear
Tokenization does not eliminate banks. It changes how they fund themselves, manage liquidity, and bear risk.
On the liability side, tokenized deposits unify payments, client settlement, and treasury functions on shared ledgers. On the asset side, tokenized lending allows rules — interest accrual, collateral triggers — to be embedded in smart contracts. Risk monitoring becomes continuous, allowing timely enforcement.
Capital markets face a similar transformation. Tokenized securities compress issuance, trading, settlement, custody, and compliance into integrated workflows. Counterparty risk declines, but liquidity demands become continuous. Automated redemptions and margining can improve efficiency in normal times—and accelerate stress in periods of market strain.
Collateralized markets may be among the earliest beneficiaries. High‑quality assets can be mobilized quickly and across platforms. But when infrastructure becomes the central hub, governance failures become systemic events.
Efficiency meets concentration
Permissioned shared ledgers concentrate activity on fewer platforms. This consolidation improves liquidity and efficiency, but amplifies the importance of operational resilience, cybersecurity, and crisis management.
Interoperability is equally critical. Fragmentation and fragile links between platforms could trap liquidity and reintroduce risk through the back door.
Instantaneous and 24/7 settlement is a defining feature of tokenization that challenges central banks’ and markets’ practices designed around business‑day cycles. Liquidity backstops may need to operate directly on tokenized infrastructures, at machine speed. Designing them raises complex questions about access, control, and moral hazard.
As financial logic moves into smart contracts, the rules governing transactions are increasingly written in code and procedures become automated.
Effective oversight must therefore extend beyond institutions to the code itself. Critical smart contracts could become too important to fail — requiring increased oversight and supervision, much as systemically important financial institutions do today.
Legal foundations matter just as much. Market participants must know whether tokenized records constitute definitive ownership, whether settlement finality is legally recognized, and which jurisdiction’s law applies. Without clarity, tokenization will remain fragmented and peripheral.
Heightened risks
For emerging and developing economies, faster and cheaper cross‑border payments, improved market access, and more efficient settlement could help overcome long‑standing inefficiencies. But the risks are equally significant.
Tokenized assets and money can move across borders almost instantaneously, bypassing the frictions that currently slow down capital flows and give policymakers time to respond. Volatile capital movements, rapid currency substitution, and erosion of monetary sovereignty become more likely — especially if privately issued global stablecoins become dominant means of payment.
Strong domestic policy frameworks remain the first line of defense. But international coordination is essential if tokenization is to support, rather than undermine, inclusion and stability.
Policy choices
The future of tokenized finance will be determined by a complex set of decisions that policymakers will have to make about issues such as the role of public and private money; the degree of interoperability; legal frameworks; code governance; liquidity backstops, and others. 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.
By Tobias Adrian
