Back to basics: tokenisation in financial markets
The debate about whether tokenization works in financial markets is over. What matters now is where it can deliver the most value. One of the most promising applications of tokenization in capital markets is the modernization of outdated financial market infrastructure. Market sentiment confirms this: according to the Broadridge Tokenization Survey, nearly three-quarters of institutions believe blockchain is likely or very likely, to become the primary system of record for digital securities. For us as investors, that means the record of what we own could soon live on a blockchain.
Just don’t confuse this with the crypto asset market, although I think this shift will become the bridge that lets crypto investors move smoothly into stocks or other financial instruments from their crypto asset holdings.
In this article, I will explain tokenization and look at how it can be leveraged in financial markets and what are key benefits of DLT TSS infrastructures, such as Axiology for issuers and investors.
Why can’t we buy tokenized stocks now?
Today, we still can’t buy DLT stocks of well-known companies in the EU. To see why, let’s explore what tokenization is.
Tokenization is the process of recording ownership of financial instruments (stocks, bonds, derivatives) as digital tokens on a distributed ledger. Both public and private ledgers can be used. Tokens then represent ownership. Similarly, ownership of a stock or other financial instrument is represented by a digital record by our custodians (investment firms or banks), and we usually don’t care what electronic system they use.
There are several ways to tokenize a financial instrument, but the easiest way to think about it is through two models from an ownership perspective: on-chain (directly in a distributed ledger) and off-chain (outside a distributed ledger). In an on-chain model, ownership is recorded directly in the ledger and there are no other records. In an off-chain model, ownership is recorded in a traditional system, but a token represents ownership on a ledger.
Several ways to tokenize financial instruments.
DLT-native tokenization
DLT-native issuance occurs when an issuer issues an instrument only on DLT. This means ownership is recorded only on a blockchain and there are no other records in any other system. The token is legally the instrument itself, so if an investor buys a token, he or she owns the share. The same company can also issue its shares in different formats: part of them (e.g., 20%) issued on DLT and the remaining (e.g. 80%) in the traditional way. There could also be different share classes (for example, a DLT class and a traditional class). Many EU countries already allow DLT-native financial instruments and have amended their national laws to allow that, while others still need to amend their national laws. It is likely only a matter of time before they do.
DLT-native issuance represents the future of how ownership of financial instruments is recorded. However, technical obstacles have so far limited its adoption. To meet demand from retail investors, market intermediaries have developed artificial tokenization methods.
Synthetic tokenization
One such method is synthetic tokenization, for example, xStocks offered by Crypto Asset Service Providers (CASPs). xStocks are not actual tokenized shares of well-known companies; they are DLT tokens that represent exposure to shares of those companies on-chain. Legally, xStocks are derivatives or debt instruments and are not shares issued by the companies they represent. By owning an xStock, an investor gets the price movement, but not the stock itself, and usually none of the shareholder rights, such as voting. An investor can usually sell this instrument only back to the issuer or on a single trading venue. Some issuers back their tokens 1:1 by holding the equivalent number of real shares on their balance sheet. Not all of them do. Before buying such an instrument, we should check how it is backed and who holds the underlying assets. Otherwise, investors could lose some or all of their money if the issuer is liquidated.
Kraken’s xStocks, for example, are derivative instruments issued by Backed Assets (JE) Limited, a Jersey-based vehicle that became part of the Kraken group. Robinhood’s tokenized stocks are fully collateralised debt securities issued by Robinhood’s subsidiary company.
Recently, in the USA OKXICE planned to offer tokenized shares of well-known companies on a venue operating under the SEC’s new exemption for tokenized securities venues, but some issuers on its list objected. In Europe, by contrast, issuers cannot prohibit third parties from offering such products.
The World Federation of Exchanges recently published a study. The study compared xStocks returns with returns on the underlying shares (xStocks may trade 24/7 or 24/5, whereas traditional shares trade when the stock exchange is open). According to the Study approximately 80% of the 61 token–share pairs were cointegrated, and the underlying traditional shares accounted for most price discovery. The study concluded that average daily returns were practically the same (0.044% vs 0.043%). However, the study covers only 11 months and uses one closing price per trading day for 61 token-and-share pairs. It's too early to draw reliable conclusions from the data, but the initial results challenge some of the skepticism that prices would differ.
If stocks are carefully backed and dividend are passed on to end investors, investors may not see a significant difference. The real cost of holding synthetic stock instead of real DLT stock may only appear to investors later. Selling such a product at a profit can trigger a taxable event. And once DLT stocks become available, investors who want the real stock may have to sell what they hold and buy again, and pay tax. For long-term investors who plan to hold for years, this is not a minor detail.
Indirect tokenization
An intermediate method is indirect tokenization (the “digital twin” model). In this model, the instrument is issued in the traditional way and ownership is recorded in a central securities depository (CSD) or custodian, which remains the legal record of ownership. A DLT token is then issued on top as an on-chain representation. The token does not itself confer ownership. Its role is operational: when it moves on-chain, the transfer is mirrored in the CSD or custodian records, and only that update completes the legal change of ownership. The two records must be identical. The drawback is that the investor bears custody fees in both the traditional and on-chain environments. However, some business models make this approach economically viable.
So if the technology exists, the regulation is in place and the market is enthusiastic, why can’t we still buy tokenized shares of well-known listed companies in the EU? The answer is simple: the market infrastructure needed to issue, trade and settle tokenized shares at scale was missing one core element – settlement asset. Since September, we have finally had the one thing that was missing: money that can move on-chain in the EU.
Current financial market infrastructure
This Section will help to understand the basic principle of how stocks are recorded. So behind what appears to be a simple transaction of buying or selling a share lies a complex financial market infrastructure involving multiple intermediaries and processes. Most investors do not think about where and how their financial instruments are recorded or transferred. However, these behind-the-scenes changes could have a very real impact on their investment experience: lower transaction costs, fewer intermediaries and more efficient processes could make investing more accessible and attractive to a wider audience, especially digitally savvy people. This is where DLT could make a difference, and why, eventually, more and more securities will be DLT-native.
Stocks are generally recorded in so-called book-entry form through a central securities depository (CSD). It is important to highlight that I am talking about stocks and other securities that are traded on a stock exchange or other trading venues. There are no such regulatory requirements for non-listed securities, so the process is much simpler and depends on national rules.
Therefore, issuers of newly issued stocks need to register the entire issue at a CSD (the CSD provides a notary service). The CSD ensures the integrity of issuance and maintains reliable records in its system. Integrity in this context means ensuring that securities cannot be accidentally or fraudulently created, destroyed or modified. Once securities are recorded at a CSD, the CSD is responsible for maintaining and managing securities accounts (central maintenance service), which helps to identify who owns the securities. This is done via the CSD’s participants (investment firms or banks). End investors usually cannot be direct participants of a CSD, although a direct holding model exists in some EU countries.
When an investor buys or sells securities, executing the trade is only the first step. The transaction must also be settled, meaning that the securities are actually transferred once payment is received. To ensure this transfer, a CSD provides a settlement service that enables securities transactions to be finalized. Without a CSD, we could not be sure that the buyer would pay. These transfers are typically carried out using delivery versus payment (DvP), meaning that securities are delivered if and only if the corresponding payment takes place.
To settle a securities transaction, the delivering and receiving parties provide the necessary details in the form of settlement instructions. These instructions must be compared to ensure that both parties agree on the terms of the transaction. If the details correspond, the instructions are matched and the transaction can proceed towards settlement.
Before settlement, transaction details may also need to be confirmed and reconciled between brokers, custodians, clearing institutions and other relevant participants. Although much of this process is automated, it still involves multiple systems and intermediaries, creating operational complexity, additional costs and opportunities for errors or settlement failures.
And while traditional settlement infrastructure is highly developed, settlement does not always happen as intended. According to the European Central Bank, in 2025, an average of 10,796 securities transactions remained unsettled in T2S at the end of each business day. The average daily value of these unsettled transactions reached €14.9 billion, illustrating that settlement inefficiencies and failures remain a challenge even in modern financial market infrastructure.
It is worth remembering that DLT offers atomic settlement, in which the transfer of securities recorded on a blockchain and the corresponding payment are executed together, on a conditional, all-or-nothing basis. The process is almost real-time. DLT simplifies settlement processes, reduces counterparty risk and minimizes the possibility of one side of a transaction being completed without the other.
Gradually, CSDs are likely to replace their existing systems with DLT-based ones. Traditional CSDs currently cannot offer DLT instruments due to regulatory restrictions (CSDR Article 39 and 40). They are required to settle transactions in central bank or commercial bank money (unlike DLT market infrastructures, they cannot use EMTs). Settlement must also be in book-entry form, so a setup where one leg of a transaction is recorded on DLT and the other in a traditional system cannot be implemented.
At present, CSDs operate in highly concentrated markets. However, competitive pressure is emerging from the EU’s DLT Pilot regime.
DLT Pilot
Operating a CSD is a licensed activity, meaning that not everyone can provide securities recording and settlement services, including through DLT. However, since the DLT Pilot Regulation (DLTR) became applicable in 2023, these functions can also be performed by DLT market infrastructures.
In practice, not all requirements under conventional financial market regulations can be directly applied to DLT. Therefore, the idea behind the DLTR is to allow exemptions from certain traditional regulatory requirements, such as those under MiFID II, MiFIR and CSDR, provided that DLT market infrastructures introduce appropriate compensatory measures. In the future, the framework will become more flexible and allow many more exemptions.
The framework allows different settlement arrangements, including central bank money, commercial bank money and, under certain conditions, e-money tokens. However, the availability of these forms of money in tokenized form remains a practical challenge.
Stablecoins, particularly e-money tokens, offer one possible solution, but they also introduce additional risks and complexity into the settlement process. For example, pre-funding may be necessary, meaning that participants need to hold sufficient funds before executing transactions. Unlike central bank money, stablecoins expose participants to risks associated with the issuer and the underlying reserve assets.
Besides providing the only regulatory pathway currently available in the EU for DLT-based stocks and other financial instruments, the DLTR also allows new experimental business models for securities trading and settlement to emerge. For example, it opens the door to self-custody (DeFi) wallets for financial instruments and allows retail investors to trade directly with each other without traditional intermediaries, subject to certain conditions.
DeFi wallets for stocks are an interesting concept. However, investors would risk losing their keys and would be exposed to cyber-attacks. If fees for DLT custody are low, then investors should not feel any pain if their stocks are held in custody by an intermediary.
Axiology's role
Currently, several market infrastructures have been authorised under the DLTR.All of them operate different business models, ranging from DeFi wallets to trading platforms for small and medium-sized enterprises.
Axiology is one of the first DLT trading and settlement systems that has been authorized by European Securities Market Authority (ESMA). Axiology retained traditional intermediaries and custodial structure in order keep the confidentially of the whole system and leverage blockchain efficiency. But this structure is much more efficient compared with traditional one.
Bond issuers can register their issuances at Axiology. This is in particular relevant for short term bonds because by using Axiology’s all-in-one solution for bond issuers not only can save operating costs, but also offer for their investors new services – visibility of wallet in their chosen system, customized corporate actions, settlement using several assets.
For its settlement service, Axiology is one of the first DLT operators connected to the ECB's Pontes, which enables settlement in central bank money. Here Axiology acts as market operator, so such system will be used in corporation with other institutions and fund managers in particular.
Overall from the perspective of issuers and intermediaries, Axiology, can also offer greater flexibility by tailoring their services to the needs of market participants. Traditional CSDs generally operate highly standardized processes, which do not always fully meet the specific needs of their markets. In some countries, for example, the services offered for corporate actions may not fully address the needs of issuers and other market participants.
Conclusions
The most significant step is the launch of ECB’s Pontes DLT euro, which brings central bank money to DLT settlement. With the launch of Pontes and its ability to facilitate settlement in central bank money, an important missing piece of the ecosystem is being addressed. Credit institutions have also started offering tokenized deposits for settlement purposes, creating opportunities for new and interesting business models to emerge.
Meanwhile, the EU is working to address the remaining legal and regulatory challenges. Proposed amendments to the DLT Pilot Regulation could significantly expand the possibilities for experimentation in financial markets. The proposed changes would allow CASPs operating trading platforms to obtain permission under the DLTR. This is an interesting concept, as CASPs already serve a large number of investors, which could make some DLT-based business models more commercially viable.
Another important aspect is access to central bank money through TARGET services. To settle transactions in central bank money, an entity generally needs access to the relevant TARGET infrastructure. Currently, access is primarily available to eligible financial institutions, including credit institutions, while in the DLT model, CSDs and DLT TSS must have direct access as well.
DLT market infrastructures, on the other hand, are still at an early stage of development and therefore have an opportunity to adapt their business models to clients’ needs. They could develop more customized solutions and potentially absorb some of the development costs themselves, rather than passing them directly on to issuers.
Ultimately, the most interesting opportunities may not necessarily come from creating entirely new financial instruments, but from making existing ones easier and cheaper to issue, hold and transfer. For investors, these changes may remain largely invisible, but their impact on costs, efficiency and access to financial markets could be significant.
Now that all three elements are in place - a settlement asset, market infrastructures that are legally and technically capable of recording and trading on DLT, and assets to issue - the market will gradually shift toward DLT-based solutions.
Enjoyed this article? Subscribe to our newsletter to stay updated on the latest insights, news and developments straight to your inbox.
