ESMA Warns of Tokenization Risks and the Need for Strict Rules

The European Securities and Markets Authority (ESMA) has issued a warning to market participants about the need for caution in the development of the tokenized assets segment, which is estimated to be worth approximately $600 billion by 2025.

ESMA’s Executive Director Natasha Cazenave noted in a letter from the regulator that tokenization has the potential to radically change the structure of financial markets, but it requires clear rules and guarantees to protect investors:

“Tokenization can lead to transformational changes in our markets. For regulators and policymakers, the priority should be ensuring that such innovations develop within frameworks that protect investors’ interests and maintain financial stability.”

According to industry reports, in 2024, Europe accounted for more than half of the global market for tokenized debt instruments. Its volume tripled to reach €3 billion ($3.5 billion). Notable initiatives include digital bonds tested by the German Ministry of Finance, covered bond tokens from Societe Generale and Santander, and a digital bond from the European Investment Bank, placed on the Luxembourg Stock Exchange back in 2022.

Cazenave also highlighted risks in the segment of tokenized stocks. Many products are issued in the form of derivatives rather than direct ownership, which can mislead investors:

“If it is structured as synthetic claims rather than direct ownership, it creates a risk of investor misunderstanding and underscores the need for clear communication and precautionary measures.”

To minimize such risks, the EU operates the DLT Pilot Regime—a regulatory “sandbox” that allows companies to test trading and settlement systems on the blockchain. ESMA has already proposed making this regime permanent, making it more flexible and adaptable to different business models.

The regulator also noted that similar steps are being taken in other jurisdictions. In the US, the first tokenized money market fund was registered back in 2021, and by 2025, the volume of tokenized funds increased by 80%, reaching $7 billion in assets under management.