Tokenisation brings new risks and opportunities to markets

By Vriti Gothi

Growing scrutiny from the International Monetary Fund over the systemic implications of tokenisation is prompting renewed debate across capital markets, with industry participants reassessing whether faster settlement cycles introduce new vulnerabilities or address longstanding structural inefficiencies.

In recent observations, the IMF cautioned that the acceleration of transaction speeds enabled by tokenisation could amplify market stress during periods of volatility. The concern centres on whether reduced settlement times might compress reaction windows for market participants, potentially heightening liquidity pressures and operational risks.

However, emerging research and industry perspectives suggest that the focus on speed alone may overlook deeper inefficiencies embedded in traditional post-trade infrastructure. Legacy systems often characterised by fragmented data environments, manual reconciliation processes, and delayed reporting—have historically contributed to risk accumulation rather than mitigation.

Current settlement cycles, typically spanning T+1 to T+2, were not explicitly designed as risk management tools. Instead, they evolved as a byproduct of operational complexity across clearing and settlement networks. Prolonged settlement timelines can increase counterparty exposure, as trades remain unresolved for extended periods, while also tying up liquidity that could otherwise be deployed more efficiently.

Against this backdrop, tokenisation is increasingly being explored as a mechanism to modernise post-trade operations. By leveraging distributed ledger technologies, tokenised systems enable synchronised data sharing and automated workflows, reducing reliance on intermediaries and minimising reconciliation delays. This shift has the potential to enhance transparency and provide market participants with near real-time visibility into transaction status and risk exposure.

According to Richard Baker, CEO and Founder of Tokenovate, the core issue lies not in the speed of settlement, but in structural inefficiencies within existing systems.“The IMF’s concerns that tokenisation could accelerate market stress place significant emphasis on speed, but this risks overlooking where vulnerabilities actually arise within today’s market structure. In practice, risk tends to accumulate between systems, where fragmented data, manual processes and delayed visibility limit the ability to act with precision,” Baker said.

He further noted that traditional settlement cycles may inadvertently extend exposure rather than reduce it. “Settlement cycles were not designed as a mechanism for risk control. They are largely a consequence of operational complexity and, in many cases, extend exposure rather than mitigate it. When trades remain unresolved for several days, counterparty risk builds and liquidity remains unnecessarily constrained.”

Industry research increasingly supports this view, highlighting that real-time or near real-time settlement frameworks can reduce counterparty risk by shortening exposure windows. Additionally, automated smart contract-based processes can enforce predefined rules, ensuring consistency and reducing the likelihood of operational errors.

Baker emphasised that applying tokenisation to post-trade workflows could address these systemic challenges by embedding risk controls directly into transaction processes. “Applying tokenisation to the post-trade lifecycle begins to address these structural weaknesses. Automated workflows and synchronised data allow for continuous risk management, supported by greater transparency and consistency across participants.”

While adoption remains in early stages, several financial institutions and market infrastructures are piloting tokenised settlement models, reflecting a broader industry shift towards digital asset integration and operational modernisation. These initiatives align with a wider push to enhance resilience, particularly in the face of market disruptions.

Baker concluded that faster settlement should be viewed not as a reduction in safeguards, but as an evolution of how they are implemented. “Faster settlement should not be seen as removing safeguards, but as embedding them more effectively within the market itself. The result is a system with lower exposure, clearer visibility and greater resilience, particularly in periods of stress.”

As regulators and market participants continue to evaluate the implications of tokenisation, the debate is likely to centre on balancing innovation with systemic stability—ensuring that efficiency gains do not come at the expense of robust risk management frameworks.