The European Securities and Markets Authority (ESMA) has issued a strong warning on the risks surrounding tokenized equities, urging regulators and investors to remain cautious as the market rapidly expands. According to ESMA’s Executive Director Natasha Cazenave, tokenization holds the potential to fundamentally reshape global financial markets, but without proper safeguards, it could expose investors to misleading products and systemic vulnerabilities.
Today, the tokenized assets market is estimated at nearly $600 billion, with Europe emerging as a clear leader in tokenized bonds. In 2024 alone, the region accounted for more than half of the global market in tokenized debt instruments, which surged threefold to €3 billion ($3.5 billion). Among the notable projects are Germany’s Ministry of Finance testing digital bonds, covered bond tokens from Societe Generale and Santander, and a digital bond issued by the European Investment Bank on the Luxembourg Stock Exchange in 2022.
However, ESMA flagged concerns regarding tokenized stocks. Many of these products are structured as derivatives rather than direct ownership of shares, which can mislead investors into believing they hold equity rights when they do not. “If structured as synthetic claims rather than true ownership, these assets present a specific risk of investor misunderstanding,” Cazenave emphasized, underlining the need for clear communication and safeguards.
To address these challenges, the EU has introduced the DLT Pilot Regime, a regulatory sandbox allowing firms to experiment with blockchain-based trading and settlement platforms. ESMA has already recommended making this framework permanent and more flexible, adapting it to varied business models. While tokenization opens efficiency opportunities, ESMA stresses that investor protection and market stability must remain top priorities.
Globally, other jurisdictions are advancing in this space. In the US, the first tokenized money market fund registered with the SEC appeared in 2021, and by 2025 tokenized funds surged 80%, reaching $7 billion in assets under management. Meanwhile, technology giants are entering the sector: Google Cloud partnered with CME Group to test institutional-grade distributed ledgers for real-time settlement, signaling growing tech-finance convergence.
Not all efforts have been well received. In July, Robinhood faced backlash after offering tokenized shares of SpaceX and OpenAI, drawing criticism from the companies themselves. Elon Musk went so far as to call such instruments “fake,” exposing the reputational risks tied to unregulated token offerings.
Another key bottleneck remains payments integration. While tokenized securities can be issued and traded, their full adoption requires a digital euro or equivalent central bank money settlement. Until then, the DLT Pilot Regime allows pragmatic solutions using tokenized commercial bank money and e-money tokens. The European Central Bank is also testing long-term DLT settlement initiatives, including projects Appia and Pontes, aimed at aligning capital markets with the digital age.
Conclusion:
ESMA’s cautious stance highlights the dual nature of tokenization: it is both a powerful driver of financial innovation and a source of potential investor risk. With Europe leading in tokenized debt but regulatory clarity still evolving, the success of tokenized assets will depend on balancing technological progress with robust investor safeguards.
