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

A bank tokenizes a money market fund on a public blockchain. Tokens can be transferred peer-to-peer between wallets, while the fund's official register of shareholders is still maintained off-chain by the transfer agent. Which risk is most directly created by this design?

Reconciliation risk is the most direct problem. Tokens move on-chain while the legal register of owners stays off-chain, so the two records can disagree about who owns the fund shares. This creates legal and operational uncertainty over settlement and entitlement, unlike interest rate or valuation effects.

  1. AReconciliation risk, because the on-chain token record and the off-chain legal register can divergeCorrect
  2. BInterest rate risk, because tokenization changes the duration of the fund's holdings
  3. CBasis risk, because tokens always trade at par to the fund's net asset value
  4. DModel risk, because tokenization removes the need for valuation models

Explanation

When ownership can change on-chain while the legal register is kept elsewhere, the two records may disagree about who the holder is. That creates legal and operational reconciliation risk. Tokenization does not alter the duration of the underlying assets, and tokens need not trade at par.

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