WFE Demands Immediate Crackdown on Equity-Mimicking Crypto Tokens
Regulators sound alarm as digital assets blur traditional securities boundaries—crypto's latest regulatory showdown heats up.
The Gray Area Explosion
Tokens now mirror stocks, dividends, and voting rights without SEC registration—sparking global regulatory panic. Watchdogs argue these instruments circumvent decades of investor protection frameworks.
Global Domino Effect
Europe's MiCA regulations already scrambling to address the loophole. Asian regulators reportedly drafting emergency measures to prevent jurisdictional arbitrage.
Market Realities
Investors flock to tokenized equities for 24/7 trading and lower barriers—ignoring that regulatory uncertainty could vaporize gains overnight. Because nothing says 'sound investment' like exploiting regulatory gaps.
Enforcement tsunami incoming—whether markets are ready or not.
The World Federation of Exchanges (WFE), the global industry group for exchanges and CCPs, has written to the SEC crypto Task Force, IOSCO’s Fintech Task Force and the European Securities and Market Authority, warning of growing investor protection risks linked to the third-party tokenisation of mostly US equities by unregulated brokers and crypto-asset trading platforms.
Third-party tokens may mimic equities without necessarily providing the same rights or trading safeguards and may be marketed to overseas and retail investors without the same protections as for domestic ones. As such, the WFE outlines serious concerns about regulatory arbitrage, lack of transparency, and the erosion of fundamental investor rights.
- Liquidity fragmentation: mimicked third-party tokenised equities traded off regulated venues could drain liquidity from traditional exchanges, harming price discovery and market integrity.
- Investor protection: holders of these tokens may not enjoy shareholder rights such as voting or dividends, often without clear disclosure.
- Custody and enforceability risks: in the event of platform failure, it’s unclear whether token holders retain legal claims to the underlying assets.
- Regulatory arbitrage: firms are bypassing traditional rules by exploiting jurisdictional gaps and marketing to retail audiences under minimal oversight.
- Issuer reputational and legal exposure: issuers of the underlying equities are exposed due to a lack of control and connection with token holders.
- Affirm technological neutrality by ensuring regulations apply equally to tokenised and traditional instruments.
- Guarantee regulatory parity by imposing equivalent standards for disclosure, trading, and settlement on tokenised equities.
- Promote supervisory co-ordination by collaborating across borders to prevent loophole exploitation.
- Clarify legal frameworks by resolving uncertainty around ownership, rights, and custody in tokenised ecosystems.
, said, “The WFE supports innovation, particularly when done based on exchange traded products. However, these mimicked products do not meet the high standards which investors are used to. What we are seeing is a blatant attempt to circumvent regulation, with some firms seeking “no action” relief from regulators or deliberately operating through legal grey areas. Most concerning is the risk to retail investors, who may be misled into believing they hold the same rights and protections as traditional shareholders. In many cases, they do not. Investor protection must remain paramount, and regulation must evolve to ensure that new technologies are not used as a mask for risk and opacity.”
Read the full paper here.
Source: WFE
