IOSCO warns that tokenized real-world assets come with evolving legal and technological risks

The International Organization of Securities Commissions (IOSCO) has released a report warning that the tokenization of real-world assets could create new risks for investors. The securities watchdog acknowledged that most of the risks associated with tokenization fall within the existing framework, but are evolving.

The IOSCO report noted that tokenized assets are gaining popularity in the global cryptocurrency community, but warned that risks such as ownership confusion and technical issues remain for investors. The report also notes that some investors face unknown risks. Although blockchain technology poses new operational and technical challenges, existing regulations can address some of the known risks.

Tuan Lim, Chairman of the IOSCO Board-level Fintech Task Force, emphasized that the report aims to help IOSCO members understand real-world tokenization applications and challenges. He added that the watchdog is committed to providing its members with insights from its analysis of emerging risks. However, he noted that adoption of tokenization remains limited.

Servais says IOSCO is committed to understanding emerging technologies.

Jean-Paul Servais, IOSCO’s Chairman of the Board, said the report reflects the company’s commitment to understanding emerging technologies and their impact on global capital markets.

IOSCO encourages regulators to consider applying policy recommendations not only to cryptocurrency and digital asset markets, but also to decentralized finance to the context of tokenized assets.

IOSCO also noted that most tokenization projects still rely on traditional transaction rails, but few provide hard evidence of improved efficiency. The watchdog said tokenization is presented as a way to speed up transactions and reduce costs, but technical barriers and legal uncertainties pose risks to investors.

“As tokenization continues to evolve, this report provides timely insight into its implementation, associated risks, and regulatory considerations related to market health and investor protection.”

–Jean-Paul ServaisChairman of the IOSCO Board of Directors

Lim also argued that tokenization has the potential to reshape the issuance, trading, and services of financial assets. He added that members developing regulatory approaches to tokenized financial assets would find it helpful to refer to the recommendations in the IOSCO report.

Alcock claims tokenization hides real risks

Jamie Alcock, professor of mathematics and finance at the University of Birmingham, said: say The real risks are hidden in tokenized assets. He emphasized that tokenization platforms distribute responsibility rather than share power. It also distributes legal obligations across a network of invisible nodes.

Alcock explained that tokenized products only reflect real-world assets and do not actually transfer legal ownership. He said the promise of fast transactions, no intermediaries and global access was attractive. But he warned that behind the flashy design and technology there are serious problems.

The mathematics and finance professor also warned that users may be left with no legal recourse if the platform fails, withdrawals are suspended or the administrator goes bankrupt. There is no obligation to protect investors, and in many cases no regulated business is involved at all.

Mr. Alcock believes this risk is right. That’s intentional. These platforms operate in different countries, with governance in one country and administration in another. Platforms may also use technologies that are beyond the control of any single regulatory authority.

He points out that the decentralization facilitated by tokenization does not necessarily mean fair control or public ownership. That means no one can be held responsible when things go wrong.

He also noted that while governance tokens are often presented as a way to decentralize power, they tend to put power in the hands of early insiders and institutional investors. Meanwhile, other users are invited into a system they do not understand or have no guaranteed rights to.

Alcock says the conflict between accountability and design is not new. This is similar to the situation in the past, where complex systems hid risks.