The EU’s process towards further harmonisation of its Capital Markets Union (“CMU”) provides a timely context for the implementation of tokenisation. The CMU aims to create a single, integrated financial market across the EU, fostering cross-border investments, mobilising citizens’ personal savings and reducing the reliance on bank-driven financing. The implementation of tokenisation within capital markets can help achieve these objectives by enabling frictionless trading and unlocking access to new pools of capital whilst increasing liquidity.
As discussed in the previous insight on tokenisation in Malta, tokenisation reimagines asset representation by embedding ownership and legal rights into programmable tokens recorded on a distributed ledger. Smart contracts underpin these systems, automating compliance, governance, and settlement processes while reducing the need for intermediaries. The operational benefits are significant, including faster settlement times, reduced costs, and enhanced transparency.
As current EU laws do not specifically regulate tokenisation in capital markets, analysing the relationship between technological innovation and established legal doctrines becomes essential. The principles of legal certainty and proportionality, which underpin EU law, must be reinterpreted in light of decentralised technologies as applied in fintech. In particular, the principle of subsidiarity, which limits EU legislative action to areas where Member State action is insufficient, may influence whether regulation of tokenised assets should occur at the Union level or be left to national competent authorities.
Can current EU laws support tokenisation in capital markets?
The free movement of capital, as established in Articles 63 to 66 of the Treaty on the Functioning of the European Union (“TFEU”), forms a key component of the EU’s single market and serves as a foundation for cross-border financial integration.
As one of the EU’s fundamental freedoms, it has undergone significant development, particularly following the Maastricht Treaty. Initially approached cautiously due to its association with monetary policy, this legal framework has evolved to recognise direct effect for capital markets, as seen in cases such as Bordessa (C-358/93). This evolution has facilitated a regulatory environment supportive of financial integration, yet advancements in technology, such as tokenisation, pose new challenges to these legal principles. The Distributed Ledger Technology (DLT) Pilot Regime, which was introduced under Regulation (EU) 2022/858, illustrates how current frameworks can accommodate innovation.
Furthermore, the classification of tokenised assets under the Markets in Financial Instruments Directive (MiFID II) remains inconsistent across Member States. While the directive can capture certain tokenised instruments, it was not designed for decentralised technologies, and its application in this context has exposed regulatory fragmentation across the EU. In fact, tokenised assets replicating traditional securities still fall under MiFID II, subject to rules on transparency, investor protection, and market integrity.
DLT’s decentralised nature also introduces jurisdictional challenges for enforcing EU law. While Article 63 TFEU prohibits restrictions on capital movements, its application to tokenised markets remains largely theoretical and untested in practice. Currently, the absence of clear EU case law on decentralised digital assets makes it difficult to rely on existing legal principles as a basis for enabling cross-border tokenised capital markets. The balance between proportionality and innovation is particularly relevant as the EU seeks to harmonise capital market rules while safeguarding against associated risks.
Supervising Risk
The EU’s Single Supervisory Mechanism (“SSM”) and Single Resolution Mechanism (“SRM”) address systemic risks. Systemic risk considerations, highlighted by the European Systemic Risk Board (ESRB), are also relevant in tokenised markets.
The decentralised nature of these markets introduces new vulnerabilities, such as cybersecurity threats and potential market manipulation. Existing regulatory structures, supported by institutions like the ESRB, provide tools for addressing these risks within the CMU framework. By leveraging current mechanisms, the EU can ensure that tokenised instruments contribute to financial stability and market efficiency.
The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have raised further concerns regarding systemic risks in tokenised markets due to issues such as market manipulation, cybersecurity vulnerabilities, and the potential for illicit activities.
Notwithstanding the above, most systemic supervisory mechanisms (such as SSM and SRM) are bank-focused, and their application to tokenised markets is unclear — particularly for non-bank crypto stakeholders who are the principal promoters of tokenisation.
ESMA’s recommendation for improving EU capital markets
ESMA issued a position paper outlining 20 recommendations aimed at enhancing the effectiveness and attractiveness of EU capital markets. This initiative seeks to align capital markets more closely with the financial needs of European citizens and businesses while ensuring the market ecosystem supports long-term economic resilience and innovation.
ESMA noted that: “Creating effective and attractive EU capital markets requires improving the wider market ecosystem and putting investors and companies at the heart of it. Steps are needed to ensure capital markets can play their role in supporting the financing needs of Europe.”
Central to the recommendations is the empowerment of retail investors through simplified and cost-efficient investment options. ESMA emphasises the need to make public markets more accessible for companies, proposing simplified listing rules and amendments to the framework governing European long-term investment funds to channel greater investment into infrastructure and innovation.
On the regulatory and supervisory front, ESMA recommends strengthening supervisory convergence among national authorities and exploring the potential benefits of further centralisation of supervision at the EU level. These proposals aim to address inconsistencies in regulatory implementation and oversight, ensuring a level playing field across Member States.
It remains unclear to what extent ESMA’s recommendations will translate into legislative reform, particularly given existing divergences in supervisory practices and EU Member States’ differing appetites for capital market centralization.
EBA report on tokenised deposits
In December 2024, the EBA published a report examining the potential benefits and challenges associated with tokenised deposits within the European Economic Area (EEA). It noted that tokenisation involves representing traditional financial assets, such as deposits, in a digital form using DLT.
The EBA’s analysis indicates that active tokenised deposits within the EEA remain minimal. Despite this limited adoption, there is a growing interest among credit institutions in exploring the deployment of deposits on DLT platforms. Potential benefits identified include increased transaction efficiency through programmability and automation, as well as improved compliance with anti-money laundering (AML) and counter-terrorist financing (CFT) requirements.
However, the EBA’s report also highlights several challenges. These include concerns related to consumer protection, operational risks, liquidity management, and the application of existing regulatory definitions. Notably, the EBA emphasises the importance of distinguishing between tokenised deposits and electronic money tokens (EMTs) issued by credit institutions under the Markets in Crypto-Assets Regulation (MiCAR). Clarifying these distinctions is crucial to ensure appropriate regulatory treatment and to prevent potential overlaps or gaps in supervision.
In light of the current limited market presence of tokenised deposits, the EBA does not see an immediate need to adjust the existing regulatory and supervisory framework. The EBA plans to promote a convergent approach to crypto-asset classification and to facilitate consistent monitoring of potential tokenised deposit use cases across the EU.
Financial Regulatory Considerations
The role of national competent authorities (“NCAs”) and EU-level supervisory bodies will be critical in fostering consistency across Member States and preventing regulatory fragmentation.
The Malta Financial Services Authority (MFSA) has demonstrated a forward-thinking approach to fintech regulation, positioning Malta as a jurisdiction that embraces innovation while maintaining regulatory rigour.
By introducing an innovative framework back in 2018 (now replaced by Chapter 647 of the Laws of Malta), the MFSA addressed the regulatory challenges associated with DLT at an early stage, providing clear rules for operators and ensuring compliance with high standards of market integrity and investor protection. This framework has enabled Malta to attract fintech operators seeking regulatory clarity and consistency. As the EU moves towards greater harmonisation in capital markets, the MFSA’s experience in developing regulatory solutions for emerging technologies offers a practical model for aligning innovation with established legal and supervisory frameworks across the entire EU market.
A significant regulatory consideration for NCAs lies in the balance between supporting technological innovation and safeguarding financial stability. Tokenisation introduces operational benefits, such as faster settlement times and increased transparency, but also presents risks, including potential vulnerabilities in cybersecurity, jurisdictional complexities, and the enforceability of smart contracts. Supervisory authorities must develop a coherent approach to address these risks, ensuring that tokenised markets operate within the boundaries of EU law while maintaining systemic integrity.
The EU’s existing financial regulatory architecture provides a strong foundation for integrating tokenised instruments into its capital markets. However, the decentralised nature of these technologies challenges conventional regulatory oversight and enforcement. Incremental regulatory adaptations, guided by the principles of proportionality and harmonisation, will be essential to address the specific compliance requirements of tokenised markets while mitigating risks associated with their operation.
The EU’s regulatory evolution is generally rooted in objectivity. Applying this principle to tokenisation in capital raising, such legislative neutrality can provide clear guidance for market participants while ensuring that the benefits of tokenisation are realised in a manner consistent with the principles of financial stability and legal certainty.
By maintaining this balance, tokenisation can contribute meaningfully to the development of resilient, inclusive, and harmonised European capital markets under the auspices of the TFEU and MiCAR.
Disclaimer: This document does not purport to give legal, financial or tax advice. Should you require further information or legal assistance, please do not hesitate to contact Dr. Mario Mizzi