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Tokenization can make financial assets easier to transfer, but it does not...

The Liquidity Problem Hiding Inside Tokenized Markets

TL;DR

Tokenization can make financial assets easier to transfer, but it does not automatically create more buyers or sellers.
The IMF’s October 2026 research found that tokenized equity market remain less liquid and more volatile than traditional markets.
Fragmented trading platforms, limited market participation, and settlement infrastructure continue to restrict growth.
Building deeper tokenized markets will require better interoperability, reliable settlement arrangements, and stronger connections to traditional finance.

A tokenized stock can trade around the clock, move between digital wallets, and settle in seconds. These capabilities make blockchain-based financial markets attractive to institutions looking for faster and more efficient infrastructure.

However, an investor who wants to sell that stock still needs someone willing to buy it at a reasonable price.

This is where an important challenge appears.

In October 2026, the International Monetary Fund (IMF) published research showing that tokenized equity markets remain less liquid, more fragmented, and more volatile than their traditional counterparts.

The findings raise important questions about how tokenized financial markets will develop as banks, asset managers, and infrastructure providers expand their involvement.

Why Faster Settlement Doesn’t Guarantee Liquidity

Liquidity describes how easily an asset can be bought or sold without significantly affecting its price.

In a highly liquid market, investors can execute large transactions with relatively small price changes. When liquidity is weak, even modest trades can move prices considerably.

Blockchain technology can improve the speed and efficiency of asset transfers. Smart contracts can automate parts of trading and settlement, reducing the need for several intermediaries to coordinate separate processes.

These improvements are valuable, but they do not automatically increase trading demand.

The IMF’s October 2026 Global Financial Stability Report examined five tokenized US equities across 11 trading venues, comparing their behavior with the underlying shares in traditional markets.

Researchers found that tokenized equities experienced approximately 1.5 times the realized volatility of their traditional counterparts. They also found weaker liquidity, particularly on decentralized exchanges.

The study covered a relatively small emerging market, and continuous trading hours partly explain the volatility differences. Still, the findings demonstrate that faster transaction infrastructure alone cannot guarantee efficient trading conditions.

Fragmentation Is Dividing an Already Small Market

Traditional financial markets benefit from established relationships between exchanges, brokers, clearing institutions, and market makers.

Tokenized markets are developing across numerous blockchain networks, specialized trading platforms, and different settlement systems.

A tokenized asset might be available on several networks, but that does not necessarily mean investors can move between those markets easily.

For example, imagine a government bond represented by tokens on two separate blockchain platforms. Investors on one platform may have access to different trading partners, settlement currencies, and redemption arrangements than investors on the other.

Even when both tokens reference the same underlying asset, the markets may remain economically separated.

This creates fragmented liquidity pools.

The IMF identifies interoperability as one of four major barriers to scaling tokenization, alongside legal certainty, regulatory clarity, and the availability of suitable settlement assets.

Without better coordination between platforms, trading activity may remain concentrated in isolated markets with limited participation.

The Difference Between Trading Access and Market Depth

One frequently discussed benefit of tokenization is the ability to trade assets outside traditional market hours.

The IMF found that more than half of the tokenized equity trading activity in its sample occurred outside normal market hours. Approximately 80% of transactions involved quantities smaller than one share.

These findings suggest that continuous trading and fractional ownership are creating useful opportunities for investors.

However, greater accessibility does not automatically translate into deeper markets.

An exchange might support trading throughout the weekend while having relatively few active buyers and sellers. In such conditions, the difference between buying and selling prices can increase, and larger transactions may become expensive to execute.

Institutional investors are particularly sensitive to these limitations because their transactions often involve substantial amounts of capital.

For tokenized markets to attract broader participation, they need dependable market makers, sufficient trading volume, and mechanisms that keep prices reasonably aligned across venues.

Settlement Infrastructure Is Another Missing Piece

Tokenized markets also depend on how payments are completed.

A financial transaction involves exchanging an asset for money. Ideally, both sides should settle together so neither participant is exposed to unnecessary risk.

This process is known as delivery versus payment.

Blockchain systems can support automated delivery versus payment, but the settlement asset must be appropriate for the participants and the transaction.

Different platforms may depend on stablecoins, tokenized bank deposits, or other forms of digital money. Differences between these arrangements can introduce additional legal, operational, and financial risks.

Recent European developments show how institutions are addressing this problem.

In September 2026, the Eurosystem introduced Pontes, connecting distributed-ledger platforms with existing European payment infrastructure to support wholesale settlement in central bank money.

The initiative creates a pathway for integrating tokenized financial assets with established monetary infrastructure.

Its importance extends beyond faster transactions. It addresses how institutions can settle transactions using a trusted form of money while maintaining connections to the broader financial system.

Tokenization Cannot Remove the Risks of the Underlying Asset

Another challenge involves the relationship between the token and the financial asset it represents.

Tokenizing a bond, private-credit investment, or investment fund does not automatically change the asset’s economic characteristics.

A private-credit investment may remain difficult to sell because buyers need time to evaluate its risks. A fund might impose redemption conditions or restrictions on eligible investors.

Representing those investments on a blockchain can improve recordkeeping and ownership transfers, but their underlying limitations remain.

This distinction becomes particularly important during market stress.

If many investors attempt to sell or redeem assets simultaneously, automated systems may execute requests faster than institutions can obtain the liquidity required to satisfy them.

The IMF warns that tokenization could amplify traditional financial vulnerabilities through tighter connections between institutions and faster transmission of liquidity pressures.

Companies building tokenized financial products must therefore consider market behavior alongside the capabilities of their technology.

What Comes Next for Tokenized Markets?

Tokenization has already demonstrated useful capabilities, including continuous trading, fractional ownership, and more automated settlement processes.

The next stage of development will depend on connecting those capabilities to markets that can support meaningful participation.

This requires progress across several areas: clear ownership rights, interoperable trading infrastructure, reliable settlement assets, and sufficient buyers and sellers.

For financial institutions and technology companies, the challenge involves coordinating technical architecture with legal requirements and established market practices.

The strongest tokenized financial infrastructure will be built around systems that remain dependable when trading activity increases, liquidity becomes limited, or market conditions deteriorate.

Conclusion

Tokenization offers a meaningful opportunity to improve how financial assets are issued, transferred, and settled.

However, the IMF’s recent findings show that liquidity remains an important limitation in today’s tokenized markets.

Faster settlement, continuous trading, and programmable ownership can make markets more efficient. Their wider success will depend on the development of deeper liquidity, better interoperability, and trustworthy financial infrastructure.

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We work with hiring companies to understand their products, technical requirements, and long-term goals. Through research-driven sourcing and careful candidate evaluation, we help organizations build strong engineering and technical teams.

References

Originally published on Medium