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

A bank pilots a tokenized money market fund whose tokens settle on a public blockchain, while the fund's cash leg is settled through a conventional bank payment system that closes at 6 pm on weekdays. The blockchain operates around the clock. Which risk is MOST directly created by this mismatch?

Settlement asynchrony is the most direct risk. Tokens can transfer around the clock while the cash leg only settles during banking hours, so one party may deliver without receiving payment at the same time, creating principal and counterparty exposure that atomic settlement would otherwise remove.

  1. ASettlement asynchrony, where token transfers may occur when the cash leg cannot settle, leaving one leg exposedCorrect
  2. BHigher interest rate risk because tokens trade continuously
  3. CReduced transparency of token ownership records
  4. DElimination of counterparty risk because the ledger is shared

Explanation

Tokens move 24/7 but the cash leg settles only in banking hours, so a token transfer can occur without simultaneous payment, leaving a principal exposure. Continuous trading does not change interest rate risk, and ledgers typically increase, not reduce, ownership visibility.

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