Digital assets and prediction markets accounted for three sections in the European Securities and Markets Authority’s (ESMA) latest report on Trends, Risks and Vulnerabilities covering H1 2026. On crypto assets it warned of the risks of increased linkages between the crypto and traditional financial sector. Regarding tokenization, it noted that issuing different tokenized versions of the same stock could fragment liquidity. Turning to prediction markets, it does not believe prediction markets have gained significant traction in Europe. That is because the major platforms do not hold licenses in the EU, and would need to in most cases.
ESMA’s deep dive into tokenization mainly focused on tokenized equities, which is understandable given the proliferation of offshore versions of US tokenized stocks. The regulator referred to these structured debt notes, which are 1 for 1 backed by stocks, as ‘wrapped’ structures. It noted the growth over 18 months from around €300 million to almost €1.9 billion in market cap, but did not shed light on how much of this relates to Europe. Given that the major tokenized stock issuers, xStocks, Ondo Global Markets and Robinhood have all issued EU prospectuses, one suspects a large proportion could be EU-based.
On the one hand, ESMA outlined some of the potential benefits of tokenization, including efficiencies, expanding investor access, programmability and atomic settlement. On the other hand, it questioned how many of these benefits are evident in these wrapped structures. Because the ownership of the underlying stock is offchain, there is no onchain single source of truth, and self custody can only be achieved indirectly via the structures. The tokenization structures also add additional layers of intermediaries, which come with complexity and risks. Settlement benefits are also elusive. Even where the token transfer happens onchain, the cash leg of the transaction often settles separately, whether through bank payments or other channels. That means the promised atomic settlement, where securities and cash change hands simultaneously, is not happening yet for some transactions.
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