EU Regulator Warns of Investor Risks in Tokenized Stocks

The European Union’s top markets regulator has raised concerns over tokenized stocks , cautioning that such instruments could mislead investors by failing to provide the same rights as direct share ownership. Speaking at a conference in Dubrovnik, Croatia, on Monday, Natasha Cazenave, executive director at the European Securities and Markets Authority (ESMA), said tokenized shares and derivatives often track the value of real equities but rarely grant shareholder privileges. “These tokenized instruments can provide always-on access and fractionalisation but typically do not confer shareholder rights,” Cazenave noted. “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.” Tokenized Stocks Expand but Face Liquidity Challenges Tokenized stocks, usually backed by shares held in special purpose entities , have gained attention for their potential to broaden access to markets. Advocates argue that blockchain-based instruments can cut issuance costs, support secondary trading, and enable fractional investments. The EU itself has experimented with tokenization since 2019, including projects by the European Investment Bank and Germany’s finance ministry. Despite these early steps, Cazenave acknowledged the sector remains limited. “Most tokenization initiatives remain small and largely illiquid,” she said, adding that instruments are typically issued via private placements and held to maturity. Interoperability between platforms also remains a hurdle, curbing efficiency and adoption. The World Federation of Exchanges last month urged regulators, including ESMA, to impose stricter oversight on tokenized stocks, stressing that they lack the investor protections built into traditional equity markets. ESMA Pushes for Safeguards as Platforms Expand While emphasizing caution, ESMA said it remains open to innovation. Cazenave argued that tokenization could improve transparency, cross-border efficiency, and market interoperability if implemented within a strong legal framework. She pointed to the EU’s blockchain pilot regime, which allows firms to test tokenized products with regulatory exemptions, as well as the MiCA regulation, as key foundations for shaping rules. Meanwhile, trading platforms are moving quickly into the space. Robinhood launched tokenized stocks in the EU in June, though the offering has already faced scrutiny from companies whose shares are being represented. U.S.-based exchanges are also exploring opportunities: Kraken introduced a tokenized stock service abroad , while Coinbase has sought regulatory approval for a similar launch. For now, ESMA’s message is clear: tokenization offers potential benefits, but without safeguards, it risks confusing investors and undermining protections that traditional markets provide. The post EU Regulator Warns of Investor Risks in Tokenized Stocks appeared first on TheCoinrise.com .