ESMA warns tokenised equity wrappers fragment liquidity and fall short on promised benefits

The European Securities and Markets Authority (ESMA) devoted three sections of its H1 2026 Trends, Risks and Vulnerabilities report to digital assets, tokenisation, and prediction markets, flagging concerns that stretch from structural design to regulatory arbitrage.

On tokenised equities, ESMA documented growth in what it calls ‘wrapped’ structures, where structured debt notes are backed one-for-one by underlying stocks. The market capitalisation of these instruments rose from roughly €300 million to nearly €1.9 billion over eighteen months. ESMA noted that because beneficial ownership of the underlying stock sits off-chain, there is no single on-chain source of truth, self-custody is only achievable indirectly, and the structures introduce additional intermediary layers rather than removing them. Atomic settlement, frequently cited as a core tokenisation benefit, is not consistently delivered in practice: when a token transfers on-chain, the cash leg often settles separately through bank payments or other channels, leaving simultaneous exchange of securities and cash unrealised for a meaningful portion of transactions.

ESMA also raised the specific concern that multiple tokenised versions of the same stock, issued by different providers, risk fragmenting liquidity across venues. Issuers including xStocks, Ondo Global Markets, and Robinhood have each filed EU prospectuses, which suggests a material share of the €1.9 billion market cap may be European in origin, though ESMA did not break out a European-specific figure. On prediction markets, the regulator assessed that these have not gained significant traction in Europe, largely because the dominant platforms do not hold EU licences and would require them to operate in most member states. ESMA also flagged broader concern about deepening linkages between crypto and traditional finance, a theme that runs through its crypto-asset commentary throughout the report.