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Tokenization’s Faster Markets Could Come With a Liquidity Squeeze

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Tokenization’s Faster Markets Could Come With a Liquidity Squeeze

Watch more: TechReg Talks With Beatrice Fares of DG FISMA and Peter Kerstens of European Commission

Tokenization promises to eliminate financial market friction, but it may take new friction to get there. The transition introduces a consequential trade-off. Removing intermediaries and settlement delays could also eliminate mechanisms that financial institutions rely on to manage liquidity, distribute risk and maintain market stability.

That tension was at the center of a discussion between Beatrice Fares, ex-directorate general for Financial Stability, Financial Services and Capital Markets Union (DG FISMA), European Commission, and Peter Kerstens, adviser at the European Commission, hosted by Competition Policy International (CPI), a PYMNTS company.

“With the tokenization, trading, clearing and settlement will be included in one single step,” Fares said, adding that this consolidation, enabled by programmable transactions and shared ledgers, could shift trust away from established intermediaries and toward the underlying infrastructure and smart contracts.

Traditional financial digitalization made trading and clearing faster without changing the institutional architecture supporting them. Tokenization introduces a different proposition by promising to bring trading, clearing and settlement onto shared digital infrastructure, potentially eliminating much of the operational complexity that has defined securities markets for decades.

Today’s settlement delays provide institutions with time to source securities, arrange financing, net obligations and perform compliance checks. Atomic settlement, in which the exchange of assets and payment occurs simultaneously, could substantially reduce counterparty exposure while removing that flexibility.

“From, in a way, post-trade, post-financing your trades, you now will have to almost pre-finance your trades,” Kerstens said.


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