Crypto Tokenization Under Scrutiny: Global Regulators Cite Risks Amid Split Opinions

Cryptocurrencies linked to real-world assets (RWAs) are drawing scrutiny, as the International Organization of Securities Commissions (IOSCO) recently warned that these innovations might introduce new risks for investors. 

In a report released on Tuesday, the global securities regulator highlighted that while many risks associated with tokenization fall under existing regulatory frameworks, new vulnerabilities may arise from the technology itself.

Wall Street Divided Over Crypto Tokenization

Tokenization—essentially the creation of blockchain-based tokens that represent real-world assets like stocks or bonds—has gained renewed interest throughout the year. New tokenized products are increasingly being marketed to the public via online brokers. 

Tuang Lee Lim, chair of IOSCO’s board-level fintech taskforce, noted that while adoption levels remain modest, tokenization could fundamentally transform the issuance, trading, and servicing of financial assets. 

However, the regulator’s report points that the diverse ways in which tokenized assets are structured could create confusion for investors, leaving them uncertain about whether they own the underlying asset or merely the crypto token. 

Additionally, the existence of third-party token issuers adds layers of counterparty risk, a concern echoed by the European Union’s (EU) securities regulator in a similar report from September.

IOSCO also cautioned that this new “vulnerability” could be exacerbated by increasing connections to the broader crypto asset market. 

Despite these risks, some mainstream financial institutions, including Nasdaq, are moving forward with tokenization initiatives. 

Will Peck, head of digital assets at WisdomTree, remarked that tokenization offers an alternative method for holding assets like gold in a digital wallet, allowing for 24/7 trading and peer-to-peer (P2P) transfers. 

He added that such innovations could serve as collateral for loans, offering a protective hedge against the depreciation of the US dollar. However, concerns persist among other Wall Street players. 

Industry Leaders Share Their Insights

Although there has been rising commercial interest in tokenization, the International Organization of Securities Commissions pointed out that actual adoption remains limited. 

Proponents of tokenized assets argue that blockchain technology can reduce trading costs, expedite settlement times, and attract a younger demographic of investors. 

However, IOSCO cautioned that the purported efficiency gains are “inconsistent,” as market participants still rely on traditional market infrastructure to facilitate trading, rather than fully replacing it with blockchain technology. The report criticized issuers for failing to publicly disclose any measurable gains.

In the US, the push for tokenization has gained momentum alongside new legislation this year, which has spurred a surge in stablecoin adoption. The crypto industry, along with major Wall Street figures, is eager to mainstream this trend. 

Vlad Tenev, CEO of crypto trading platform Robinhood (HOOD), recently described tokenization as an unstoppable “freight train.” Meanwhile, Larry Fink, CEO of BlackRock, asserted in a summer newsletter that the concept of tokenization has the potential to revolutionize investing.

Featured image from DALL-E, chart from TradingView.com