Skip to content

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

A tokenization platform operator that also acts as trading venue, custodian, and issuer of the tokens is reviewed by a regulator. Which regulatory concern is the most direct consequence of this vertically integrated market structure?

The main concern is concentration of conflicts of interest and operational risk. With trading, custody, and issuance in one entity, a single failure or misconduct could disrupt every stage at once, so regulators typically seek functional separation and strict client-asset segregation.

  1. AIt reduces conflicts of interest because all functions are in one entity
  2. BIt concentrates operational and conflict-of-interest risks, and a single failure could impair trading, custody, and settlement at onceCorrect
  3. CIt guarantees investor protection because custody is internal
  4. DIt removes the need for segregation of client assets

Explanation

Combining venue, custody, and issuance functions raises conflicts of interest and creates a single point of failure across the trade lifecycle, which is why regulators consider separation or strong safeguards. Internal custody does not guarantee protection and segregation of client assets remains critical. Integration increases rather than reduces conflicts.

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