Skip to content

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

A regulator worries that tokenized collateral could increase systemic risk through interconnectedness. Which scenario BEST represents this concern?

The best example is many institutions reusing the same tokenized collateral across platforms and protocols. Such interconnected, composable and potentially leveraged use means a failure or price shock in one venue can propagate rapidly to others, which is the systemic risk channel regulators worry about.

  1. AA single institution tokenizes its own equity for internal accounting only
  2. BMany institutions reuse the same tokenized collateral across multiple platforms and protocols, so a failure or price shock on one platform propagates quickly to othersCorrect
  3. CA tokenized asset is settled on a ledger that only one participant can access
  4. DAn investor holds tokens in a self-custody wallet with no leverage

Explanation

Systemic concerns arise when the same assets are rehypothecated and linked across platforms, creating rapid transmission of shocks. The other scenarios involve isolated or unlevered positions with no meaningful channels for contagion.

Did you get it right without looking?

One question tells you little. A timed set on Tokenization and Financial Market Inefficiencies shows your real accuracy, how long you take and where you lose marks.

Practise Tokenization and Financial Market InefficienciesFree diagnostic mock

More Tokenization and Financial Market Inefficiencies questions