European finance is entering a new era with the rise of tokenisation, which involves representing traditional financial assets – such as shares – in the form of digital tokens on the blockchain. Presented as a revolution capable of expanding market access and reducing costs, tokenisation is attracting more and more retail investors. But behind this promise lies considerable risks, as the European Securities and Markets Authority (ESMA) recently pointed out.
Key takeaways
- Contrary to what some investors believe, tokenised shares do not confer real rights (voting, dividends).
- In the event of the issuer’s bankruptcy, token holders risk losing their capital without any solid recourse.
- ESMA and the World Federation of Exchanges (WFE) warn of a “false sense of security“.
- The MiCA regulation represents progress, but does not fully address the specific features of tokenised shares.
- The major challenge: finding a balance between financial innovation and investor protection.
An illusion of ownership worries regulators
According to Natasha Cazenave, Executive Director of ESMA, the main danger lies in the confusion created by these hybrid financial products. Tokenised shares can give the impression of owning a real share of a company, when in reality they confer neither voting rights at general meetings nor dividend payments.
These tokens are often issued through special purpose vehicles (SPVs) that simply replicate the value of an underlying share. In other words, the investor does not own the share itself, but a contractual financial instrument. In the event of the issuer’s bankruptcy, there is no solid guarantee: the invested capital could disappear.
It is precisely this “false sense of security” that worries European regulators, keen to preserve confidence in the financial markets.
Between innovation and investor protection
Tokenisation is attracting more and more players, including mainstream platforms like Robinhood and Kraken, which now offer tokenised stocks to their clients. But this democratisation also increases the risk of confusion, especially for less sophisticated investors.
The World Federation of Exchanges (WFE) has joined ESMA in its concerns. In a letter to regulators, it emphasises that these products “mimic the value of listed securities without offering the associated rights”. This situation directly threatens market integrity.
For the WFE, it is imperative that tokenised stocks be subject to the same transparency, custody, and investor information requirements as traditional stocks. Otherwise, commercial abuses and litigation could increase.
A European and global regulatory challenge
ESMA recognises the potential of tokenisation: greater accessibility, lower costs, and democratisation of investment. However, existing projects remain limited and their promises are sometimes overestimated.
The recently adopted MiCA (Markets in Crypto-Assets) regulation represents an important step. It regulates cryptoassets and imposes new obligations on issuers. However, it does not fully cover hybrid cases such as tokenised shares, which lie at the crossroads between financial securities and digital tokens.
The debate remains open:
- Should these instruments be integrated into the traditional regulatory framework for stock markets?
- Or should specific rules be created to address their hybrid nature?
The WFE also calls for international coordination with US and Asian regulators and the IOSCO (International Organisation of Securities Commissions). Without harmonisation, the risk of regulatory arbitrage is high: platforms could exploit grey areas to issue risky products without oversight.
The urgent need to strike a balance
ESMA’s warning illustrates a reality: Europe is engaged in a race against time. How can we foster financial innovation without compromising investor security?
If tokenisation is set to transform market access, its success will depend on the ability of regulators and industry players to:
- guarantee product transparency,
- effectively protect investor rights,
- establish a clear and coherent regulatory framework.
In short, the future of tokenised shares will depend on a delicate balance between the democratisation of investment and regulatory prudence. If innovation takes precedence over protection, public confidence in the financial system could collapse.
