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

A risk manager at a bank reviews a proposal to hold tokenized government bonds on a permissionless blockchain, with settlement through a stablecoin. Which concern is most relevant to financial stability under a 'same risk, same regulation' perspective?

The key concern is stablecoin redemption runs. If holders lose confidence and redeem en masse, issuers may need to sell reserve assets quickly, and such fire sales can transmit stress into the underlying government bond market, linking digital asset stress to traditional financial stability.

  1. ATokenized assets eliminate market risk because prices are recorded on a ledger
  2. BStablecoin redemption runs could force fire sales of the reserve assets, transmitting stress to the underlying bond marketsCorrect
  3. CTokenization removes the need for any legal certainty on asset ownership
  4. DSmart contracts guarantee that no operational failures can occur

Explanation

If the settlement stablecoin loses confidence, redemptions can force liquidation of reserve assets such as government bonds, linking crypto stress to traditional markets. Ledger recording does not remove market risk. Legal ownership clarity remains essential. Smart contracts can contain coding errors, so operational risk persists.

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