Crypto tokens tied to traditional financial assets could
present new risks for investors, the global securities regulator IOSCO said today
(Tuesday). The regulator highlighted concerns as the finance industry remains
divided over the merits of “tokenization.”

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While regulators warn of risks, interest in tokenization has
grown this year, with products offered through online brokers. Traditional
banks have also adopted blockchain-based tokenization, processing financial
assets in hours, while similar
processes on crypto platforms may take months. This highlights uneven
adoption and efficiency across market participants.

IOSCO Flags New Risks in Tokenization

IOSCO, which represents regulators covering almost all of
the world’s securities markets, said most risks related to tokenization are
already addressed by existing frameworks. However, the organization noted that
the underlying technology may introduce new risks and vulnerabilities.

Tuang Lee Lim, chair of IOSCO’s board-level fintech
taskforce, said that while adoption is still “limited,” tokenization
could “reshape” the way financial assets are issued, traded, and
serviced.

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Tokenization Faces Spill-Over Market Concerns

The regulator said different structures of tokenized assets
could make investors unsure whether they own the underlying asset or only the
crypto token. Third-party token issuers also create counterparty risks. IOSCO
added that these concerns echo warnings from the European Union’s securities
regulator in September.

“Tokenization could also suffer from potential
spill-over effects from increased inter-linkages with the crypto asset
markets,” IOSCO said.

Wall Street Cautious Despite Tokenization Experiments

Some mainstream financial firms, including Nasdaq, have been
exploring tokenization. Other Wall Street players have expressed caution. While
institutions have experimented with blockchain-based asset versions for years,
IOSCO said actual adoption remains “limited.”

Supporters of tokenized assets argue that blockchain can
reduce trading costs, speed up settlement, allow 24/7 trading, and attract
younger investors. IOSCO, however, said that “efficiency gains are
uneven” because market participants still rely on traditional
infrastructure for trading.

This article was written by Tareq Sikder at www.financemagnates.com.