The EU issues warnings to potential investors on tokenised stocks that prohibit shareholder rights but trade easily. Transparency and protection were required.
The securities regulator of the European Union has given a stiff warning against tokenised stocks. They are assets based on blockchain that track the price of a share but typically do not give any shareholder rights.
These products present a risk of investor misunderstanding, said Natasha Cazenave, the executive director of ESMA.
The tokenised stocks enable investors to purchase the digital token, which is based on the price of the equity. But possession of these tokens almost never carries with it possession of the underlying shares.
These financial products are developed by various fintech companies, which keep the stocks in special purpose vehicles.
Robinhood has opened EU tokenised stocks. Coinbase is the other company that is driving forward this industry.
These platforms may offer innovative access to equities, but ESMA warns that this may lead to confusion about what investors are actually purchasing.
The Reason Why Tokenised Stocks Can Be Misleading to Investors
Cazenave has stressed that tokenised stocks have the advantages of such things as fractional ownership and 24-hour trading.
However, the majority of shareholders do not transfer the rights of shareholders, like voting or a dividend. Such a difference is not clear to the investors, hence may cause misunderstanding.
She demanded effective communication and effective protection of investors. The danger is that investors assume they are the full owners of a risk investment when that is not the case.
This concern was supported last week by the World Federation of Exchanges. Global securities authorities should exercise control and, if necessary, limit tokenised stocks, they urged.
According to them, these products are associated with new risks and may negatively affect the integrity of financial markets in general.
Through these challenges, tokenisation is perceived as transformative by supporters of blockchain. With blockchain, tokenization has the potential to expand market efficiency by allowing access to all assets, such as stocks, bonds, and real estate in small units.
Market Reality and Regulation Current
According to Cazenave, to date, tokenisation campaigns are relatively small and illiquid in nature. Lots of projects are still not widely liquidated or trusted. This is an additional risk of loss of investors or mispricing.
Regulators have a fine job to do. They have to strike a balance between promoting innovation in fintech and safeguarding players in the market.
The presence of ESMA is an indication that tokenised stocks require clear regulations prior to widespread mainstream adoption.
Cryptocurrency exchanges and other financial technology companies are working towards the wider adoption of these digital contracts in Europe and beyond.
The warning of the EU is unlike those in the blockchain community who take an optimistic view that the technology can fundamentally democratize investment access.
The barriers can be reduced through tokenization to allow ownership of fractions of shares and to allow trading 24/7.
