Crypto tokens tied to the value of stocks could mislead investors as they don’t usually give holders the same rights as a direct shareholder, says the European Union’s markets regulator.
Several companies have tokenized stocks and derivatives that are backed by the shares they represent held in a special purpose company, European Securities and Markets Authority (ESMA) executive director Natasha Cazenave said at a conference in Dubrovnik, Croatia on Monday.
“These tokenized instruments can provide always-on access and fractionalisation but typically do not confer shareholder rights,” she said.
“If structured as synthetic claims rather than direct ownership, this can create a specific risk of investor misunderstanding and underlines the need for clear communication and safeguards.”
The World Federation of Exchanges late last month urged global securities regulators, including ESMA, to crack down on tokenized stocks, arguing they lack investor protections built into the actual asset they track.
Tokenized stocks still “largely illiquid”
Cazenave said the EU had “taken a leading role” in tokenizing assets, with initiatives and pilots as far back as 2019 through the bloc’s investment bank and Germany’s finance ministry.
She added that the demonstrations showed tokenization, where assets are represented on a blockchain, could “broaden access, lower issuance costs, and support faster and more efficient secondary trading.”
“Despite these promising signs, most tokenization initiatives remain small and largely illiquid,” Cazenave said. “Instruments are typically issued via private placements and held to maturity. Interoperability between issuance platforms is limited.”
ESMA keen on new tech but urges safeguards
Cazenave said that ESMA is “keen to continue to explore what new technologies may bring,” but the priority was developing them in a way that safeguards investors and financial stability.
She added that tokenization could improve “interoperability, transparency and cross-border efficiency” while cutting costs — if it’s implemented “with the right legal framework.”
The EU has opened a pilot for blockchain technology, allowing firms to test products with exemptions, which Cazenave said, along with lessons learned from the EU’s Markets in Crypto-Assets (MiCA) Regulation, would help with how to regulate tokenizing assets.
Robinhood, Coinbase dive into tokenizing stocks
The US-based trading platform Robinhood Markets launched tokenized stocks for trading in the EU in June, which have faced scrutiny from some of the companies represented and EU member nations.
US-based crypto exchange Kraken also launched a tokenized stock offering in June, which it has not made available in the US or the EU, while rival exchange Coinbase Global has sought approval from regulators to launch its own offering.
Magazine: Robinhood’s tokenized stocks have stirred up a legal hornet’s nest