Regulators Warn: Tokenized Stocks Lack Real Ownership Rights

Investors could misunderstand tokenized stocks: EU markets watchdog

European Securities and Markets Authority (ESMA) executive director Natasha Cazenave has raised concerns that tokenized stocks may lead to "investor misunderstanding," emphasizing the need for clear communication and safeguards. Tokenized stocks, which represent the value of underlying equities on blockchain platforms, typically do not confer the same shareholder rights as traditional stock ownership, according to Cazenave’s remarks at a conference in Dubrovnik, Croatia. These instruments, she explained, often involve synthetic claims rather than direct ownership, increasing the potential for confusion among investors [1].

Several companies have already issued tokenized stocks and derivatives, with the assets held in special purpose companies. While Cazenave acknowledged that tokenization offers advantages such as 24/7 market access and fractional ownership, she stressed that such benefits should not overshadow the importance of investor protection. The World Federation of Exchanges has similarly called on regulators to address the lack of investor safeguards in tokenized stocks, arguing that current structures do not align with the protections inherent in traditional equity ownership [1].

Cazenave noted that the EU has taken a leading role in exploring asset tokenization since as early as 2019. Initiatives involving the bloc’s investment bank and Germany’s finance ministry have demonstrated the potential of blockchain-based asset representation to enhance market efficiency. She cited advantages such as broader access to investment opportunities, reduced issuance costs, and faster secondary trading. However, she highlighted that most tokenization efforts remain limited in scale and liquidity, with instruments typically issued through private placements and held to maturity [1].

Despite these challenges, Cazenave emphasized that ESMA remains open to the potential of new technologies, provided they are implemented within a robust legal and regulatory framework. The EU has launched a blockchain pilot program, allowing firms to test tokenization products under regulatory exemptions. Insights from this initiative, along with lessons from the Markets in Crypto-Assets (MiCA) Regulation, will be crucial in shaping future rules for tokenized assets [1].

The U.S. trading platform Robinhood Markets has recently expanded into tokenized stocks in the EU, a move that has drawn scrutiny from some market participants and EU member states. Meanwhile, crypto exchanges such as Kraken and Coinbase are also exploring the space, with Kraken offering tokenized stocks in select jurisdictions and Coinbase seeking regulatory approval for its own product. These developments underscore the growing interest in tokenized stocks, even as regulators continue to assess the risks and necessary safeguards [1].

Source: [1] Tokenized Stocks May Mislead Investors, Says EU Watchdog (https://cointelegraph.com/news/investors-misunderstand-tokenized-stocks-eu-markets-watchdog)