ESMA Official Says Tokenized Stocks Could Confuse Investors

Natasha Cazenave, Executive Director of the European Securities and Markets Authority (ESMA), said tokenized stocks could mislead investors because they don’t give the same rights as real shares.

On Monday, at a conference in Dubrovnik, Croatia, Cazenave explained in her keynote speech that tokenized stocks backed by shares held in special entities make it possible to trade continuously and own smaller fractions of a company. However, she noted that these tokens usually don’t give investors traditional shareholder rights like voting.

Natasha warned that treating tokens as indirect claims instead of actual ownership could confuse or mislead investors. She said there needs to be clearer information and stronger safeguards in place. 

Just last month, Reuters reported that the World Federation of Exchanges (WFE) urged regulators like ESMA to tackle the issue of tokenized stocks, pointing out that they don’t offer the same protections as the real assets they’re tied to.

Cazenave noted that while the European Union (EU) has been testing tokenization since 2019 with its investment bank and Germany’s finance ministry, these assets are mostly small and difficult to trade. According to her, they are often sold privately and held until they mature, with limited ability to work across different platforms, making trading less efficient.

She further said that tokenization could make investing easier, cheaper, and faster if there are strong legal rules in place. ESMA is keen to explore new tech but focuses on keeping investors safe and markets stable. 

The EU is testing the blockchain program that will allow companies to experiment with new products under fewer regulations. The future tokenization guidelines will be guided by insights from the Markets in Crypto-Assets (MiCA) rules.

Tokenized Stocks Gain Traction Amid Regulatory Scrutiny

New tokenized stock offerings could change how investments work, creating possibilities for both big and small companies. As regulations take shape, firms must comply while exploring this new approach, according to industry developments.

In June, the US-based trading platform Robinhood began offering tokenized stock trading in the EU, but some companies and EU nations criticized it. In June, Kraken, a U.S. crypto exchange, launched a tokenized stock trading product but made it unavailable in the U.S. and the EU. Further, Coinbase is also seeking regulatory approval from the SEC for its own tokenized stock platform.

Also Read: Custodia CEO Flags TradFi Vulnerability in Crypto Bear Market