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

A supervisor is considering how to regulate tokenized securities traded on public permissionless blockchains with decentralized intermediaries. Which regulatory approach is most consistent with the principle of 'same activity, same risk, same regulation'?

Apply existing securities, custody and conduct rules to tokenized instruments that serve the same economic function as traditional ones. The principle is technology-neutral, so exemptions would invite regulatory arbitrage, and ignoring the instrument's economic function would defeat the purpose.

  1. AApplying the existing securities, custody and market conduct requirements to tokenized instruments that perform equivalent economic functions as traditional securitiesCorrect
  2. BExempting tokenized securities from investor protection rules because they use new technology
  3. CBanning every form of tokenization regardless of the risk it poses
  4. DApplying only technology standards and ignoring the economic function of the instrument

Explanation

The principle is technology-neutral: instruments with the same economic function and risk should face the same rules regardless of the technology used. Exempting them creates regulatory arbitrage, a blanket ban is not the principle, and ignoring economic function contradicts it.

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