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

A risk manager reviews a tokenized bond traded on several decentralized exchanges, each with its own separate liquidity pool. The same token trades at different prices across venues, and arbitrageurs cannot close the gaps quickly. Which feature of tokenized markets best explains this persistent fragmentation?

Fragmentation arises because tokenized assets sit on separate platforms and liquidity pools with limited interoperability. Liquidity cannot be pooled, and arbitrageurs cannot easily move capital between venues, so price differences persist. Settlement delay is not the cause, since on-chain settlement is typically faster than conventional cycles.

  1. ATokens are always settled with a T+2 cycle, which delays arbitrage
  2. BIsolated platforms and pools with limited interoperability prevent liquidity from being pooled across venuesCorrect
  3. CCentral bank money is always used for on-chain settlement, which raises costs
  4. DTokenized assets cannot be priced because they have no underlying claim

Explanation

Tokenization on separate platforms with limited interoperability splits liquidity into silos, so price differences can persist because capital cannot move efficiently between them. Tokenized settlement is typically faster than T+2, so the delay explanation is wrong.

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