Blockchain-based assets, especially tokenised equities, may lead to investor misunderstanding. That is the latest warning pronounced by the European Union securities watchdog ESMA (European Securities and Markets Authority).

The executive director of ESMA, Natasha Cazenave, informed during a conference in the Croatian city of Dubrovnik that several fintech firms had developed offerings giving investors exposure to listed shares or blockchain-based derivatives backed by corporate equities held through very specific vehicles.

“These tokenised instruments can provide always-on access and fractionalisation but typically do not confer shareholder rights,” Cazenave said during her speech. She pointed out that this “can create a specific risk of investor misunderstanding and underlines the need for clear communication and safeguards.”

What are tokenised equities?

The problem of tokenised equities is that investors may expect they become shareholders in the underlying company. But this is misleading. Tokenised equities are more financial derivatives than pure securities, stocks, or shares.

A tokenised stock is a blockchain-based asset that represents exposure to traditional equity, such as shares of a listed company. [1] These tokens are typically designed to mirror the price of the underlying asset, meaning if the real stock price goes up or down, the value of the token follows suit.

Do tokenised stocks grant ownership rights?

Typically, each token represents one share (or fraction of a share) in the underlying entity. However, tokenised stocks do not usually grant direct legal ownership in the company. They generally offer only price exposure or synthetic replication through derivatives.

In some cases, tokenised stocks may include rights like dividends, depending on the structure and platform. Custody of these tokens is managed by the platform, rather than the token holders themselves.

ESMA and global concerns

ESMA’s concerns echo those of the World Federation of Exchanges, which last week called on securities regulators to clamp down on tokenised stocks. The federation warned that these assets create new risks for investors and could harm market integrity.

Crypto proponents argue that tokenisation will transform the underlying infrastructure of financial markets, by allowing assets such as bank deposits, stocks, bonds, funds and even real estate to be traded as blockchain-based tokens.

On the contrary, Cazenave highlighted that tokenisation could bring efficiency gains but noted that “most tokenisation initiatives remain small and largely illiquid”.

Sources:

[1] https://www.gemini.com/cryptopedia/what-are-tokenized-stocks-and-how-do-they-work