European Regulator Warns of Risks in Tokenised Stocks

The European Securities and Markets Authority (ESMA) has raised concerns about the potential for “investor misunderstanding” linked to tokenised stocks, a growing segment of blockchain-based assets. These financial instruments, which provide exposure to shares in public companies, typically do not grant buyers shareholder rights, according to ESMA’s executive director, Natasha Cazenave.

At a recent conference in Dubrovnik, Cazenave highlighted that several financial technology firms have introduced offerings that give investors access to listed shares or blockchain derivatives backed by corporate stock held through special purpose vehicles. While companies like Robinhood and Coinbase are venturing into this emerging sector, the ESMA warns that the lack of shareholder rights associated with tokenised stocks poses significant risks.

Cazenave stated, “These tokenised instruments can provide always-on access and fractionalisation but typically do not confer shareholder rights.” She emphasized that this situation can lead to misunderstandings among investors, underscoring the necessity for clear communication and protective measures.

Concerns voiced by ESMA reflect similar sentiments expressed by the World Federation of Exchanges, which recently urged securities regulators to impose stricter oversight on tokenised stocks. The federation indicated that these new financial products introduce risks that could jeopardize market integrity.

Proponents of tokenisation argue that it has the potential to revolutionize financial markets by enabling the trading of various assets, including bank deposits, stocks, bonds, funds, and even real estate, as blockchain-based tokens. Cazenave acknowledged the possible efficiency gains from tokenisation but pointed out that “most tokenisation initiatives remain small and largely illiquid” at present.

As the landscape of financial assets continues to evolve, the call for regulatory frameworks that protect investors while fostering innovation in the sector is becoming increasingly urgent. The ESMA’s warnings highlight the need for both investors and regulators to navigate the complexities of tokenised assets carefully.