Tokenized stocks, a form of digital assets that reflect the prices of listed companies, have been gaining popularity in the European Union and beyond. However, concerns have been raised by top regulators regarding the potential risks associated with these innovative financial products.
Natasha Cazenave, the executive director of the European Securities and Markets Authority (ESMA), recently cautioned that many tokenized stock products available in the EU do not provide investors with actual shareholder rights, such as voting or dividends. This lack of clarity could lead retail investors to mistakenly believe they own company shares when, in fact, they do not.
Unlike traditional equity purchases, tokenized stocks are typically issued through special-purpose vehicles or intermediaries, with the tokens simply tracking the underlying stock’s price. While tokenization offers benefits such as fractional trading and 24/7 market access, the absence of ownership rights poses a significant risk of investor misunderstanding.
Platforms like Robinhood and Kraken have been expanding their offerings of tokenized stocks in Europe and other regions, prompting the World Federation of Exchanges to raise similar concerns. The group has called on regulators to enhance oversight to prevent potential risks to investors and market integrity.
Despite the potential benefits of tokenization in modernizing finance and increasing access to various assets, Cazenave noted that most existing projects are still limited in scale, illiquid, and have yet to deliver the efficiency gains promised by advocates. European regulators are therefore focused on striking a balance between fostering innovation and safeguarding investor interests.
As the technology behind tokenized stocks continues to evolve, it is clear that regulators will closely monitor this sector to ensure that investors are adequately protected. By addressing the challenges and risks associated with tokenization, the EU aims to promote a more transparent and resilient financial market for all participants.