European Regulator Flags Tokenized Stocks, Stresses Need for Safeguards

The top markets regulator of the European Union calls for a balance between financial innovation and investor protection, because tokenization – the digital representation of financial instruments on distributed ledger – stops interest on the world markets.

Natasha Cazenave, executive director of the European Securities and Markets Authority, said On Monday, the shift in the financial markets, powered by distributed ledger technology, has promising but demands.

“Tokenization … can lead to a transformational change of our markets,” she said. “For supervisors and policy makers, the priority must be to ensure that such innovation develops within a framework that guarantees the interests of investors and retains financial stability.”

Europe is already good for more than half of the global tokenised issue with fixed -income income, which tripled last year to € 3 billion ($ 3.5 billion), according to figures in the industry.

TThe worldwide market for Tokenized assets is estimated at around $ 600 billion, with growth that expects in the coming years.

In Germany, the Ministry of Finance installed digital bonds, while the French Societe General and the Santander of Spain Security Stokens already pioneered for covered bonds in 2019. In 2022, the European Investment Bank issued a digital bond on the Luxembourg Stock Exchange.

Other areas of law also move quickly. In the US, the first sec-registered Token-Mergenmarktfonds was launched in 2021. Tokenized funds have risen by 80% this year, which now represents around $ 7 billion in assets.

Tech companies are also coming in. Google has recently unveiled a ledger of institutional quality that has been designed to support tokenization and real -time settlement, which underlines how mainstream becomes the trend.

Other projects have been more controversial.

Robinity came under fire In July for offering “tokenized shares” in companies such as SpaceX and OpenAi. It resulted in the return of the companies, who said they were not involved in the rollout, and SpaceX CEO Elon Musk noticed the equity as ‘fake’.

According to Cazanave, most initiatives remain small, illiquid and experimental. Many tokenized shares are, for example, structured as derivatives instead of direct shareholders, which expresses concern about the misunderstandings of investors.

“If structured as synthetic claims instead of direct ownership, this can be a specific risk that investors misunderstandings and emphasizes the need for clear communication and guarantees,” said Cazenave.

To manage the risks, Cazenave said that the EU DLT pilot regime offered a regulatory sandbox where market participants and supervisors could test approaches under controlled circumstances.

ESMA has changed to make the pilot permanent and more flexible, tailor -made thresholds and eligible assets for the risks of each business model.