Policy choices will determine whether tokenized finance strengthens or fragments the financial system. Tokenization does not eliminate banks. It changes how they fund themselves, manage liquidity, and bear risk.
an blog article by Tobias Adrian
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.
The article in full here
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