IMF says tokenization will reshape financial markets, not replace institutions

The International Monetary Fund has said tokenization will fundamentally reshape financial market infrastructure but will not eliminate the institutions that underpin the global financial system. This is according to an IMF working paper titled “The Evolution of Financial Market Infrastructures in a Tokenized Economy: Exploring Blockchain Implementation Options for Issuance, Central Clearing, Settlement, and Reporting.”

What the paper says

The paper was prepared by Yaiza Cabedo, Tommaso Mancini-Griffoli, Fabian Schär, and Nicolas Zhang. It argues that while blockchain technology and smart contracts can automate many core market functions, legal entities and regulated institutions will remain essential for governance, compliance, risk management, and accountability.

The IMF said tokenization represents the most significant technological shift in financial market infrastructure since the dematerialization of securities but stressed that it will transform, not replace, the sector. “Tokenization has the potential to reshape Financial Market Infrastructures more profoundly than any technological shift since securities dematerialization,” the paper stated.

According to the IMF, smart contracts and distributed ledger technology can automate several core market functions. These include record-keeping, reconciliations, delivery-versus-payment settlements, and collateral movements. This reduces operational frictions and improves efficiency.

The paper noted that shared programmable environments could streamline the lifecycle of financial transactions. This enables more efficient collateral use, reduces reconciliation requirements, and improves coordination across financial services.

However, the IMF stressed that functions such as risk governance, margin calibration, default management, business continuity, legal oversight, and supervisory intervention cannot be fully replaced by computer code. The institution concluded that tokenization is more likely to redefine how financial market infrastructure operates rather than eliminate its core functions.

Hybrid models and new challenges

According to the IMF, the future of financial market infrastructure is likely to be built around hybrid models that combine blockchain technology with traditional institutional oversight. Smart contracts are expected to handle a growing share of operational and transactional processes. Regulated institutions will continue to oversee governance, compliance, legal accountability, and intervention during periods of market stress.

The paper noted that hybrid structures will remain necessary where blockchain-based settlements lack legal recognition, ownership depends on off-chain legal enforcement, or transactions span multiple distributed ledger platforms.

While tokenization can reduce settlement risks and improve efficiency, it also introduces new challenges. These include smart contract vulnerabilities, governance concentration, dependence on external data sources (oracles), privacy concerns, and fragmentation across blockchain networks.

The IMF said policymakers should focus on defining the boundary between processes that can safely be automated and those that require institutional oversight and legal accountability. The paper added that the central policy question is no longer whether financial market infrastructure will remain relevant, but how existing institutions should evolve to accommodate blockchain-enabled financial systems.

What this means for Nigeria

Tokenization refers to the process of converting ownership rights or sensitive information into digital tokens that can be securely stored and transferred on blockchain networks without exposing the underlying data. Nigeria’s Securities and Exchange Commission has recently tightened oversight of digital asset operators through an incubatory programme.

In mid-2025, President Bola Ahmed Tinubu signed into law the Investment and Securities Act 2025, marking a major milestone in Nigeria’s capital market reform. The new legislation, which repeals the former Investments and Securities Act No. 29 of 2007, strengthens the legal and regulatory framework for investments and capital market activities. The Act also classifies digital assets as securities.

Tokenised assets are digital assets, but when they offer an investment gateway, they qualify as securities. This puts tokenised equities on a regulatory knife-edge. Unlike traditional financial systems that rely on multiple intermediaries, tokenized markets can automate several transaction processes using programmable smart contracts.

Financial market infrastructures include payment systems, securities depositories, central counterparties, clearing houses, settlement systems and trade repositories. These support the issuance, clearing, settlement and reporting of financial transactions. Global financial institutions, regulators and central banks are increasingly exploring tokenization to improve market efficiency, reduce settlement costs and support faster cross-border transactions. Despite these technological advances, the IMF maintains that legal certainty, regulatory oversight and institutional governance will remain indispensable components of financial markets.