Tokenization in the European Union: legal challenges

In the European Union, MiCA settled much of the regulation of crypto-assets, as explained in MiCA: the European framework for crypto-assets. But anyone who wants to turn a share, a bond or a fund unit into a token faces a different landscape: capital markets rules designed for accounts and central registers, different private law in each country and an experimental regime with narrow limits.

This article organizes these challenges into four layers. The basis is Regulation (EU) 2022/858, documents from the European Securities and Markets Authority (ESMA) and the Council of the EU, and the German electronic securities law, all consulted on October 8, 2026. This is not legal advice: anyone planning to issue or trade tokenized assets in Europe needs advice in the home country.

First layer: is the token a crypto-asset or a financial instrument

Everything starts with classification. MiCA does not apply to crypto-assets that qualify as financial instruments. These remain under MiFID II, the directive that regulates investment services, and under the other capital markets rules.

The pilot regime regulation made this explicit. Its article 18 changed the MiFID II definition of financial instrument to include instruments “issued by means of distributed ledger technology” (Regulation 2022/858, art. 18). In other words: a share on a blockchain is a share.

The boundary, however, is not always obvious. To guide regulators and companies, ESMA published on December 17, 2024 guidelines on when a crypto-asset should be treated as a financial instrument (ESMA, final report on the guidelines). Two principles guide the text:

• Technology neutrality: equivalent assets and activities should follow the same rules, whatever their form.
• Substance over form: what counts is what the token gives the holder (a right to profit, interest, a vote), not the name the issuer chose.

Hybrid tokens, which mix functions, are the most delicate case. For ESMA, if a hybrid token has the characteristics of a financial instrument, those characteristics prevail. The document also recommends reassessing the classification periodically, because a token’s function may change over time.

The practical consequence is that classification is done case by case. A classification error can send an offering to the wrong regime, with different prospectus, licensing and conduct requirements.

Second layer: the law that defines the security remains national

The EU has harmonized much of market regulation, but not the private law that says what a security is, how it is transferred and who owns it. Regulation 2022/858 itself acknowledges, in recital 45, that these activities are also covered by non-harmonized national rules, such as company law and securities law (Regulation 2022/858).

The effect shows up in the table in which ESMA records which national authorities follow the classification guidelines. In the version of July 17, 2026 (ESMA, compliance table):

• The Czech central bank says it will only comply with the part on tokenized securities once the legal definition of a security is amended. Today, the formal concept of a security in the Czech Civil Code prevents applying the guidelines on this point, and there is no legislative proposal or timeline.
• The Slovak central bank reports that the country’s law does not allow tokenized securities to be issued. As a result, no crypto-asset issued under Slovak law can be classified as a transferable security. A change is planned, also with no proposal or timeline.
• Poland and Romania appear as non-compliant “by default”, because they had not yet designated the competent authority.

In other words, the same token may be a security in one country and have no possible classification as such in another.

Some countries have acted on their own. Germany passed the Electronic Securities Act (eWpG) in 2021. It allows certain securities, such as bearer bonds and registered shares, to be issued by electronic registration instead of a paper certificate, with the same legal effect. One of these registers can be a crypto securities register (Kryptowertpapierregister), kept by whoever the issuer designates (eWpG, §§ 1, 2, 4 and 16). National solutions like this help within each country, but they do not create a European standard.

Third layer: the infrastructure assumes accounts, not wallets

The rules on central securities depositories and settlement were written for a world of securities accounts, book-entry records and settlement in central bank money. A distributed ledger does not automatically fit these concepts.

The DLT Pilot Regime was created precisely to test exemptions from these rules. It has applied since March 23, 2023 and allows three types of infrastructure: a trading system, a settlement system and a system that does both (ESMA, DLT Pilot Regime). The details of this design are in the secondary market for tokenized assets.

The official list shows the extent of the legal friction. In January 2026, there were six authorized infrastructures: one in Czechia, two in Germany, one in Lithuania, one in France and one in Spain. Five of them received exemptions from provisions of the central securities depositories regulation. In four cases, there were more than a dozen, including the definitions of “dematerialised form”, “securities account” and “book-entry form”, as well as the rules on settlement finality and cash settlement (ESMA, list of authorized infrastructures).

Money is another issue. The regulation requires payments to be settled in central bank money, including tokenized, and only allows commercial bank money or e-money tokens as alternatives (Regulation 2022/858, art. 5). Without a tokenized version of central bank euro available at scale, the cash “leg” usually stays off the blockchain, which reduces part of the promised gain.

Fourth layer: limits on scale and duration

The pilot was designed as a small test. It only admits shares of companies with a market capitalization below €500 million, bonds with an issue size below €1 billion and UCITS funds with assets below €500 million (ESMA, DLT Pilot Regime). In addition, each infrastructure has an aggregate cap.

According to a document from the Council of the EU presidency, the European Commission itself acknowledges that the cap of €6 billion for admitting new instruments, and of €9 billion for triggering the transition strategy, limited the practical use of the pilot (Council of the EU, WK 2365/2026 REV 1). The authorizations were also temporary, which discourages long-term investment in an infrastructure that may have to be dismantled.

What is under review

On December 4, 2025, the European Commission published a market integration and supervision package. ESMA welcomed the proposal and highlighted the transfer to the European level of supervision of certain infrastructures and crypto-asset service providers (ESMA, December 4, 2025).

For tokenization, according to the Council document of February 2026, the proposal provides for (Council of the EU, WK 2365/2026 REV 1):

• End of product limits: all financial instruments could be traded or recorded on DLT infrastructure. The Commission argues that using DLT does not, by itself, make an instrument riskier.
• Higher caps: €100 billion in the regular regime (with transition from €150 billion) and €10 billion in a new simplified regime (transition from €15 billion).
• End of the time limit on permissions granted under the pilot.
• New participants: organized trading facilities and crypto-asset service providers licensed under MiCA could apply for authorization. On this point, countries were divided, and some pointed to conflict-of-interest risks.

It is a proposal. It must be negotiated and approved by the European Parliament and the Council, and the final text may change. As of the date of this article, the editorial team has not found final approval.

What this means for readers following from Brazil

The European case shows that regulating crypto-assets and regulating the tokenization of financial assets are different tasks. Brazil faces a similar dilemma, discussed in tokenization and capital markets: regulatory limits.

For anyone evaluating a tokenized offering linked to Europe, three questions help:

• Under which regime was the token issued? MiCA, securities rules or neither.
• Which national law defines the holder’s rights? It is what says whether the token is the security itself or just a parallel record. See also why tokenizing an asset does not eliminate risk.
• Is the infrastructure authorized? Check ESMA’s list to see whether the platform appears among those authorized under the pilot regime.

What to take from this article

• In the EU, a token that grants share or bond rights is a financial instrument. The technology does not change the nature of the asset, and MiCA does not apply to it.
• The biggest legal obstacle is national law: what a security is and how it is transferred varies from country to country, and there are member states whose law still does not accommodate tokenized securities.
• The DLT Pilot Regime works, but at small scale. The December 2025 proposal expands limits and time frames, but still depends on the legislative process.