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

Policymakers consider how tokenization could change market inefficiencies such as settlement delays and intermediary chains. Which statement best reflects a balanced regulatory view?

A balanced view holds that tokenization can reduce some frictions, such as settlement delay and reconciliation, but introduces new risks including platform fragmentation, interoperability gaps, and legal uncertainty. Regulators therefore stress consistent, risk-based oversight rather than assuming regulation is unnecessary or banning the technology.

  1. ATokenization removes all frictions, so existing regulation is unnecessary
  2. BTokenization may reduce some frictions but can create new risks such as fragmentation across platforms and legal uncertainty, so regulators emphasize consistent oversightCorrect
  3. CTokenization increases frictions in every case so it should be banned
  4. DTokenization only affects retail investors, so systemic risk is irrelevant

Explanation

A balanced view recognizes efficiency gains such as faster settlement and fewer reconciliation steps, while noting new issues like liquidity fragmentation, interoperability gaps, and legal ambiguity that call for consistent regulation. Claims that tokenization removes all frictions, or worsens all of them, are too extreme. Institutional use makes systemic risk relevant.

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