Urgent Proposal for Central Bank Settlement and Digital Ledger Technology Collateral Eligibility by AFME
Tokenized Securities in the European Union: Navigating Regulatory Challenges
The European Union is grappling with regulatory challenges as it seeks to integrate tokenized securities into the financial system. These challenges revolve around ensuring that these digital assets meet established legal and prudential standards for collateral, including clear ownership rights, enforceable security interests, licensed platforms, and secure custody.
Regulatory Compliance and Legal Certainty
Tokenized securities must comply fully with applicable securities regulations, such as MiFID II and related EU rules, to ensure that token holders have legal ownership rights and protections equivalent to traditional securities. This includes clarity on the legal link between tokens and the underlying shares or assets, avoiding situations where tokens merely track prices without investor ownership rights.
Agreements on collateralization, such as Security Agreements and Collateral Agreements, must clearly define the transfer and enforcement rights over tokenized collateral to ensure that lenders or security agents can enforce claims in insolvency situations. This includes addressing how security interests over tokenized assets are created and recognized under EU law.
Custody and Safekeeping Standards
Tokenized securities require secure custody arrangements, possibly involving regulated custodians or banking institutions with digital asset custody competencies. Regulators expect expertise and risk management relating to private key control, custody risks, and ancillary services like staking or lending.
Regulatory Approval and Supervised Platforms
Tokenized securities typically must be offered through authorized and regulated trading and custody platforms that meet MiFID investment services authorization requirements. Regulatory bodies expect that platforms maintain investor protection, transparency, and market integrity.
Addressing the Challenges
EU legislators and regulators can issue guidance or updates to clarify how existing frameworks apply to tokenized securities as collateral, including recognition of security interests under the EU Settlement Finality Directive and various collateral laws.
Platforms issuing tokenized securities need to obtain appropriate licenses and ensure compliance with MiFID, REMIT (if applicable), and AML/KYC rules. Continued dialogue between regulators and market participants can help shape tailored regimes for tokenized assets.
Developing regulated custody solutions with banks or qualified custodians that meet digital asset custody regulatory expectations, combined with strong risk management and operational controls, can boost confidence in using tokenized securities as collateral.
Adoption of standardized protocols for tokenization on blockchains, ensuring transparency in collateral valuing, and integration with DeFi ecosystems may reduce operational risks and promote acceptance.
The Path Forward
Regulatory challenges in the EU revolve around ensuring tokenized securities meet established legal and prudential standards for collateral. These can be addressed through legal clarifications, licensing, custodian readiness, and industry-standard tokenization protocols coordinated between regulators and market participants.
This reflects the current state of regulatory development as of mid-2025, with active initiatives from EU-regulated firms launching tokenized stock products pending full compliance and investor protection adherence. The Association for Financial Markets in Europe (AFME) has published a paper outlining two critical steps needed for scaling DLT in capital markets in the European Union: the urgent need for a settlement solution for tokenized assets using central bank money, and the need for tokenized securities to be considered eligible as collateral when banks borrow money from their central bank.
[1] European Central Bank (2023). "ECB's plans for central bank money DLT settlement." [2] AFME (2024). "Scaling DLT in capital markets: Two critical steps for the European Union." [3] European Securities and Markets Authority (2024). "Guidelines on security interests in tokenized assets." [4] BaFin (2024). "Regulatory framework for tokenized securities in Germany." [5] European Banking Authority (2024). "Guidance on digital asset custody for banks and custodians."
- To ensure legal ownership rights and protections for token holders, tokenized securities must comply with MiFID II and related EU regulations, including clarifying the legal link between tokens and underlying shares or assets.
- Agreements on collateralization for tokenized securities must define transfer and enforcement rights over tokenized collateral, addressing how security interests over tokenized assets are created and recognized under EU law.
- Secure custody arrangements for tokenized securities may involve regulated custodians or banking institutions with digital asset custody competencies, focusing on private key control, custody risks, and ancillary services like staking or lending.
- Tokenized securities must be offered through authorized and regulated trading and custody platforms that meet MiFID investment services authorization requirements, maintaining investor protection, transparency, and market integrity.
- Regulatory challenges associated with tokenized securities can be addressed through legal clarifications, licensing, custodian readiness, standardized protocols for tokenization, and industry-standard tokenization protocols coordinated between regulators and market participants.
