Europe’s top markets regulator is urging a careful balance between innovation and investor protection as tokenization — the digital encoding of financial instruments on distributed ledgers — expands across global markets.
Natasha Cazenave, executive director of the European Securities and Markets Authority (ESMA), warned that while tokenization could transform market infrastructure, it must develop inside a framework that preserves investor interests and financial stability.
Industry figures put the global tokenized assets market at roughly $600 billion, with Europe accounting for more than half of tokenized fixed-income issuance. That issuance alone tripled last year to about €3 billion ($3.5 billion). Meanwhile, tokenized funds have jumped about 80% this year to roughly $7 billion in assets under management.
Practical pilots are already under way: Germany’s finance ministry tested digital bonds, France’s Societe Generale and Spain’s Santander issued security tokens for covered bonds in 2019, and the European Investment Bank put a digital bond on the Luxembourg exchange in 2022. Tech entrants are accelerating the trend — Google recently announced an institutional-grade ledger aimed at tokenization and real-time settlement.
But ESMA highlights real risks. Many tokenized equities are structured as derivatives rather than direct holdings, which can create investor misunderstanding and liquidity challenges. Controversial rollouts — such as Robinhood’s tokenized shares offering, which drew public criticism and pushback from issuers — illustrate potential pitfalls.
To manage these risks, ESMA supports keeping and expanding the EU’s DLT Pilot Regime as a regulatory sandbox, proposing amendments to make it permanent and more flexible so thresholds and eligible assets better match each business model’s risk profile.
Why it matters: Tokenization promises faster settlement and wider access to assets, but regulators view clear rules, disclosure and investor safeguards as essential to avoid market harm as the sector scales.
Source: Decrypt. Read the original coverage for full details.