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

A central bank is evaluating how widespread tokenization of financial assets could change liquidity dynamics in a run scenario. Which statement best reflects a financial stability implication of faster, near-continuous settlement and trading?

Faster, near-continuous settlement and trading can accelerate runs because investors can redeem or sell quickly, leaving authorities less time to respond. It does not remove first-mover advantages, fix liquidity mismatches in underlying assets, or prevent price volatility.

  1. AInvestors can redeem or sell tokens more quickly, which can speed up runs and reduce the time authorities have to respondCorrect
  2. BNear-continuous trading removes first-mover advantage in redemptions
  3. CFaster settlement guarantees that liquidity mismatches in the underlying assets disappear
  4. DContinuous trading makes asset price volatility impossible

Explanation

Speed and 24/7 access can accelerate redemptions and sales, compressing the time for intervention, especially where tokens promise liquidity that the underlying assets cannot deliver. First-mover advantage may persist, liquidity mismatches remain, and volatility is not prevented.

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