EU Regulator Warns Tokenized Stocks Require Strong Safeguards

The European Union’s European Securities and Markets Authority (ESMA) has urged caution as tokenized stocks are surging. Executive Director of ESMA, Natasha Cazenave stressed that although distributed ledger technology (DLT) promises to reshape the financial markets, it must have a robust framework to maintain stability and protect investors.

Cazenave said, “Tokenization … could lead to a transformational change of our markets. For regulators and policymakers, the priority must be to ensure that such innovation develops within a framework that safeguards investors’ interests and preserves financial stability.”

European Market Needs Stronger Regulation

Europe is already a key player in tokenization. The region accounts for over half of global tokenized fixed-income issuance, which tripled in 2023 to €3 billion ($3.5 billion). Germany’s finance ministry has piloted digital bonds, while France’s Societe Generale and Spain’s Santander pioneered tokenized covered bonds as early as 2019. The European Investment Bank also issued a digital bond listed on the Luxembourg Stock Exchange in 2022.

Globally, the tokenized assets market is estimated at roughly $600 billion, with rapid growth projected. In the U.S., the first SEC-registered tokenized money market fund launched in 2021. Tokenized funds have since expanded 80% this year, now representing about $7 billion in assets under management.

Technology firms are also entering the space. Google recently introduced an institutional-grade ledger to facilitate tokenization and real-time settlement, underscoring the technology’s move into the financial mainstream.

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But not all experiments have been welcomed. In July, Robinhood faced backlash after listing “tokenized stock” offerings in companies such as SpaceX and OpenAI without their involvement. SpaceX CEO Elon Musk slammed the move, calling the products “fake.”

Cazenave warned that many tokenized equities remain small, illiquid, and experimental. In some cases, the products are structured as derivatives or synthetic claims rather than direct shareholdings, which could mislead retail investors.

“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,” she noted.

The EU's DLT Pilot Regime gives companies a regulated sandbox where they can test tokenized products under supervision to lower risks. ESMA has suggested that the pilot be made permanent and more adaptable by adjusting the thresholds and assets that are eligible to fit each business model.