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

An asset manager tokenizes units of a private real estate fund and lists them on a platform with few market makers. Tokens trade at a 6% discount to the fund's reported NAV during a stress episode. Which interpretation BEST reflects a key challenge of tokenization highlighted in market inefficiency discussions?

The discount illustrates that tokenizing an illiquid asset does not make the underlying liquid. Thin, fragmented secondary markets and limited arbitrage can let token prices drift away from NAV, so the discount reflects market microstructure and liquidity frictions rather than necessarily a change in fundamental value.

  1. ATokenization guarantees price convergence to NAV because trading is continuous
  2. BThe discount shows that tokenizing an illiquid asset does not make the underlying asset liquid; fragmented, thin secondary markets can produce prices that deviate from fundamental valueCorrect
  3. CThe discount proves the underlying property is worth 6% less than NAV
  4. DThe discount is caused solely by blockchain transaction fees

Explanation

Tokenization changes the wrapper, not the liquidity of the underlying property. With few market makers, price discovery is thin and limits to arbitrage allow deviations from NAV. The discount does not necessarily show a fundamental loss, and fees alone rarely explain it.

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