EU Watchdog Flags Investor Risk as Tokenised Stocks Spread Across Crypto Markets

TLDR:

• Tokenised stocks link to share prices but often don’t provide real shareholder rights, creating risks of misunderstanding.
• ESMA’s Natasha Cazenave warned tokenised stock buyers may assume ownership that doesn’t exist under current structures.
• The World Federation of Exchanges urged regulators to step in, citing risks to investors and market trust.
• Tokenisation may improve efficiency but remains small and illiquid, limiting its role in broader market adoption.

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A European regulator has raised new concerns about tokenised stocks. These blockchain-based assets mirror share prices but do not grant ownership. The warning points to a risk that buyers could mistake exposure for equity rights. 

Regulators stressed that investors may not fully understand the structure behind these products. The latest caution adds weight to growing scrutiny of tokenisation in traditional markets.

ESMA Flags Tokenised Stocks Risk for Crypto Investors

According to a Reuters report, the European Securities and Markets Authority (ESMA) highlighted the risks at a conference in Dubrovnik. 

ESMA executive director Natasha Cazenave stated that fintech firms are rolling out products tied to listed shares or blockchain derivatives. These products are often structured through special purpose vehicles holding the underlying stock.

Cazenave stressed that while tokenised instruments allow fractional ownership and 24-hour access, they do not grant shareholder rights. 

That means buyers may think they are company shareholders when, in fact, they only hold exposure to price movements. She called this gap a risk that requires clear communication from providers.

The ESMA director explained that many tokenised products in Europe remain small and illiquid, limiting their current reach. She added that efficiency gains from tokenisation could emerge in the future, but oversight and safeguards remain essential.

This view aligns with warnings from the World Federation of Exchanges, which urged regulators last week to tighten rules. The group said tokenised stocks could mislead investors and threaten market trust if not addressed.

Crypto Market Push Meets Regulatory Scrutiny

The growth of tokenised stocks is attracting major players, including broker Robinhood, which has launched them in the EU. 

Crypto exchanges are also moving into the sector as they seek new ways to bridge digital assets and traditional markets. Supporters say tokenisation can reshape financial systems by enabling stocks, bonds, and even real estate to be traded as blockchain tokens.

Yet regulators caution that innovation must not confuse retail buyers. ESMA stressed the difference between exposure and actual equity rights. Without clarity, investors could assume they own parts of companies when they do not.

The Reuters report noted that Cazenave’s remarks underscored the gap between market hype and current reality. She explained that tokenisation might reduce friction in financial markets in the long run. For now, though, adoption remains limited, and liquidity is thin.

While the sector waits for clearer regulation, the message from Europe is direct. Tokenisation has potential, but the risks of misunderstanding are immediate and must be addressed.

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