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

A tokenized bond market has fragmented across several unconnected blockchains, each with its own liquidity pool. A risk committee asks how this fragmentation relates to market inefficiency. Which conclusion is best supported?

Fragmentation across non-interoperable blockchains splits liquidity and can leave price discrepancies for the same asset, since arbitrage across platforms is hindered. It does not automatically improve price discovery, backing does not cure split liquidity, and settlement assets remain necessary.

  1. AFragmentation can split liquidity and create price discrepancies for the same underlying asset, because lack of interoperability limits arbitrage across platformsCorrect
  2. BFragmentation always improves price discovery because more venues exist
  3. CFragmentation has no effect on liquidity as long as the tokens are fully backed
  4. DFragmentation eliminates the need for settlement assets such as central bank money

Explanation

Without interoperability, liquidity is divided across platforms and arbitrageurs cannot easily move assets and cash between them, so price gaps for the same asset can persist. More venues do not automatically improve price discovery, full backing does not fix split liquidity, and settlement asset needs remain.

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