Tokenized shares, a new breed of digital assets in which the prices of listed companies reflect, can give investors a false sense of ownership and undermining market confidence, according to a European top regulator.
Natasha Cazenave, executive director of the European Securities and Markets Authority (ESMA), warned that many tokenized stock products that are marketed in the European Union do not grant the actual shareholders’ rights, such as votes or dividends.
She said that the lack of clarity in the way these assets are presented can cause retail investors to believe that they keep company shares while they don’t actually do that.
Shareholder rights absent
In contrast to traditional stock purchases, tokenized shares are often issued via vehicles with special purposes or intermediaries, and the tokens only follow the price of the underlying shares.
Cazenave emphasized that although tokenization promises functions such as fractional trade and 24-hour market access, the absence of ownership rights is a “specific risk of investor abuse”.
Her comments come as platforms, including Robinhood and Kraken, tokenized supply supply in Europe and other regions.
Last week, the World Federation of stock exchanges repeated ESMA’s concerns and insisted on strengthening controls before the sector increases. The group warned that without intervention, tokenized products, investors can expose to unexpected risks and the market integrity of the market.
Efficiency still elusive
Proponents have argued that tokenization can modernize financing by reducing costs and broadening access to assets, ranging from shares and bonds to real estate.
Cazenava recognized this potential, but noted that most existing projects are limited in scale, illiquid and far from delivering the efficiency benefits to be recommended by lawyers.
For now, European regulators seem to have the intention of balancing innovation with investor protectors, indicating that Tokenized shares are examined as the technology develops.