IMF warns emerging trend could trigger deeper flash crashes

Tokenization has quickly become one of the biggest trends in crypto, positioned as a bridge between traditional finance and decentralized finance.

However, the International Monetary Fund recently remarked that crypto tokens linked to traditional financial assets may pose new risks for investors.

What is tokenization?

The idea behind tokenization is simple, which is to turn real-world assets such as cash, treasuries, or equities into blockchain-based tokens that can move globally, settle instantly, and support automated financial services.

In practice, tokenization follows a straightforward three-step model.

First, the underlying asset is placed with a custodian. For example, cash held in a bank account or a pool of United States Treasuries is immobilized, so it cannot circulate in its traditional form.

Second, a smart-contract–driven token is issued on a blockchain to represent that locked asset.

Third, the token circulates freely across blockchain networks, with holders maintaining digital claims on the reserve.

In the case of cash, this model produces a stablecoin: each token is redeemable for $1 and backed by an equivalent amount of cash sitting with a regulated custodian.

The same architecture now underpins tokenized treasuries, which mirror short-term government debt, and tokenized equities, which can provide fractional ownership of public or private shares.

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IMF flags both opportunities and risks

On Nov. 28, the International Monetary Fund published an explainer video outlining the advantages and potential dangers of tokenization.

According to the IMF, tokenized assets could make markets “faster and cheaper” by reducing the need for intermediaries such as clearinghouses and registrars.

Researchers studying early tokenized financial markets have already “found significant cost savings,” the IMF said, noting that programmable settlement rails may allow near-instant clearing and more efficient collateral use.

Faster settlement could also lower counterparty risk and reduce complex reconciliation processes that characterize today’s global markets.

However, the IMF also cautioned that the same speed and automation can magnify volatility.

Automated trading systems have “already led to sudden market plunges known as flash crashes,” and tokenized platforms, which execute trades instantly, may be “more volatile” than their traditional counterparts.

In periods of market stress, chains of smart contracts “written on top of each other” could behave “like falling dominoes,” escalating what would ordinarily be local disruptions into systemic shocks.

The fund also warned about fragmentation. If multiple tokenized networks emerge that “don’t speak to each other,” market liquidity could weaken, undermining the promise of faster, cheaper and more resilient financial systems.

Related: Why real world asset tokenization is the next big thing in crypto

Institutions deepen their tokenization experiments

Major financial institutions are not waiting for regulatory clarity before experimenting with blockchain-based money.

JPMorgan Chase & Co., Citi, and other global banks have spent the past several years building tokenized deposit systems, liquidity networks, and programmable settlement tools.

On Nov. 12, JPMorgan officially launched its blockchain-powered deposit token, JPM Coin (JPMD), for institutional clients.

The token represents dollar deposits held at the bank and enables 24/7 transfers via Base, Coinbase’s layer-2 network — a sharp contrast to traditional banking rails, which operate only during business hours.

Citi began exploring tokenization much earlier. In May 2023, the bank unveiled plans for Citi Token Services, a private blockchain platform designed for automated trade finance and global payments.

Instead of using public networks such as Bitcoin or Ethereum, Citi intends to deploy its own enterprise blockchain to support cross-border transfers, liquidity solutions, and around-the-clock settlement.

More recently, in October, Citi’s global head of partnerships and innovation Biswarup Chatterjee told CNBC that the bank has been building digital asset custody infrastructure for the past two to three years and expects to roll it out soon.

Related: How tokenization is unlocking new revenue in sports and art

This story was originally published by TheStreet on Nov 28, 2025, where it first appeared in the Policy section. Add TheStreet as a Preferred Source by clicking here.