Global Securities Watchdog Warns Tokenization Brings New Risks

The International Organization of Securities Commissions (IOSCO) has issued a report highlighting the emerging risks from the increasing practice of tokenization, where blockchain-based tokens represent real-world financial assets such as stocks or bonds. While many of the risks fall under existing regulatory frameworks, the watchdog emphasises that the underlying technology introduces new vulnerabilities. Investors may be uncertain whether holding a token constitutes ownership of the underlying asset or merely a representation, and counterparty risk from third-party issuers of tokens adds further complexity.

Tokenization has generated interest for its potential to enhance efficiency and liquidity, yet actual adoption remains limited. Many market participants continue to rely on traditional infrastructure rather than fully leveraging blockchain to simplify or accelerate settlement and servicing of assets. As tokenized assets become more interconnected with crypto markets, new spill-over risks may arise, creating challenges for both regulators and investors.

The IOSCO report signals that tokenization is not without its challenges. Although the concept is often presented as a way to democratize access and enable near-continuous trading, gaps in legal clarity, ownership rights, and infrastructure robustness persist. For emerging markets, including those in Africa and Nigeria, the implications are significant, as regulatory and technological gaps could expose local investors and institutions to risks previously confined to advanced financial markets.

The warning underscores the need for careful planning, strong regulatory frameworks, and investor education. Tokenization carries transformative potential for global financial markets, but without solid foundations, the risks it introduces may outweigh its benefits. Firms pursuing tokenized assets must balance innovation with prudence, ensuring legal clarity, operational resilience, and effective risk management as adoption grows.