Tokenisation has the potential to introduce new operational and technological risks as it continues on its trajectory to shape the capital markets of the future, says Europe’s regulatory watchdog.
The concept is drawing increasing attention from market participants and regulators, according to ESMA, which highlighted the technology’s growing relevance to financial market infrastructure in its latest ‘risk monitoring’ report.
According to the regulator, tokenisation is attracting growing interest as a potential driver of change in financial markets, including through the use of programmable money, real-time settlement and direct-to-investor distribution models.
However, the regulator also warned that while tokenisation does not fundamentally change the nature of the assets being tokenised, it can introduce new operational and technological risks, including smart contract vulnerabilities, digital wallet security risks and potential dependencies on specific platforms or blockchains.
The report highlighted how tokenisation could also support the expansion of decentralised finance by bringing traditional assets onto blockchain-based platforms. Although ESMA noted that adoption currently remains limited, with most activity concentrated in relatively narrow use cases and small volumes.
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Available evidence cited in the report suggests the market could expand significantly in the coming years. Research from Boston Consulting Group and Ripple forecasts that tokenised assets, including stablecoins, could grow from around $600 billion in 2025 to $18.9 trillion by 2033.
Benefits of tokenisation vary depending on the use case, but the underlying technology “promises universal efficiency gains through greater automation and speed,” according to the report, citing research from the International Securities Services Association (ISSA).
According to the regulator, real-time and atomic transactions could shorten settlement cycles and reduce counterparty risk, while smart contracts could automate processes and reduce the need for intermediaries and reconciliation.
The report also cited research from the International Securities Services Association which found that collateral tokenisation could reduce settlement fails by 13% and generate approximately $340 million in annual savings for Tier 1 firms.
Hurdles to overcome
ESMA’s ‘risk report’ further outlined several barriers to broader adoption, including interoperability challenges between blockchain platforms, the absence of widely accepted on-chain cash solutions, and regulatory uncertainty.
The watchdog suggests that many tokenised assets currently operate on private blockchains controlled by a single entity or a small group of market participants, which can recreate the same silos the technology was intended to address.
Moreover, ESMA pointed to ongoing regulatory developments aimed at supporting tokenisation. In the EU, the DLT Pilot Regime provides a framework for market infrastructures using distributed ledger technology, with six DLT market infrastructures authorised since the regime launched in March 2023.
The European Commission has also proposed amendments to the regime as part of its market integration package, aimed at enabling broader adoption of distributed ledger technology in EU financial markets.
Elsewhere, the report noted that the UK’s Financial Conduct Authority has consulted on proposed rules for fund tokenisation, while in the US, regulatory initiatives are also exploring ways to support on-chain financial markets.
ESMA said early adoption is likely to focus on fixed income securities, money market funds and other high-quality assets, particularly due to their role in collateral operations.
Commenting on the broader market environment, Verena Ross, chair of ESMA, said: “ESMA’s latest risk monitoring analysis highlights the potential for disorderly corrections that could spill over across markets. In this context, disciplined risk monitoring and risk management remain essential to ensure orderly markets, a core objective for ESMA.”