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FRM Part II · FRM Exam Part II · Tokenization and Financial Market Inefficiencies

A bank is evaluating a tokenization project in which ownership records of a bond are represented as digital tokens on a distributed ledger. Which statement best describes what tokenization means in this context?

Tokenization means representing a claim on an asset, such as a bond, as a digital token recorded on a programmable distributed ledger. The underlying legal claim still exists. Tokenization changes how ownership is recorded and transferred, not the nature of the issuer's obligation.

  1. AConverting a claim on an asset into a digital token recorded on a programmable ledgerCorrect
  2. BReplacing the issuer's legal obligations with an algorithmic promise that carries no recourse
  3. CEncrypting the bond's payment data so that only the custodian can view it
  4. DConverting the bond into a central bank reserve balance

Explanation

Tokenization represents claims on real or financial assets as digital tokens on a programmable platform such as a distributed ledger. The legal claim remains; only its representation and transfer mechanism change. The option claiming obligations are replaced by an algorithmic promise confuses tokenization with unbacked crypto assets.

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