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Crypto firms’ tokenized stocks spark investor protection concerns

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Crypto companies are racing to launch stock-backed tokens, but traditional financial firms and regulators are sounding alarms over potential risks to investors and market stability.

Encouraged by President Trump’s pro-crypto policies, major players such as Robinhood, Gemini, and Kraken have rolled out tokenized stock products in Europe, with Coinbase and Dinari seeking U.S. approval. Even Nasdaq has proposed offering tokenized shares — a sign that the concept is moving into mainstream finance.

These blockchain-based instruments are designed to mirror traditional equities while enabling 24/7 trading and instant settlement. Their combined market value has surged to $412 million from just a few million a year ago, according to RWA.xyz. But critics warn that many of these products lack ownership rights, dividends, and regulatory safeguards, making them more akin to derivatives than stocks.

“There’s a real risk investors don’t know what they’re buying,” said Diego Ballon Ossio, a partner at Clifford Chance. Legal experts say inconsistent rights and disclosures across issuers could undermine market integrity.

While some firms like Kraken and Ondo Finance claim to fully back their tokens with underlying assets, others — including Robinhood’s tokens pegged to OpenAI — have faced regulatory scrutiny for using derivative structures.

Regulators in both the U.S. and Europe are divided over how to classify and supervise these products. Financial groups including Citadel Securities and SIFMA argue that tokenization should not bypass investor protection rules, warning that liquidity could fragment across unregulated markets.

Coinbase to Face Narrowed Shareholder Lawsuit After Judge’s Partial Dismissal

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A U.S. federal judge has ruled that Coinbase must face a narrowed shareholder lawsuit alleging it misled investors about key business risks, including the likelihood of being sued by the Securities and Exchange Commission (SEC).

In a 59-page ruling issued Tuesday night, Judge Brian Martinotti of the U.S. District Court in New Jersey rejected Coinbase’s bid for a full dismissal of the case. The lawsuit accuses the cryptocurrency exchange and several of its top executives and board members of fraudulently concealing regulatory and financial risks in public statements over a two-year period.

The shareholders allege Coinbase made misleading claims suggesting it was unlikely to face SEC enforcement, and that customer assets would remain protected even if the company filed for bankruptcy. These statements, made through earnings calls, regulatory filings, blog posts, and social media, allegedly inflated investor confidence.

Judge Martinotti ruled that plaintiffs could not proceed based solely on “group pleading”, where statements in company-wide documents do not specify individual responsibility. However, he allowed the lawsuit to continue for claims where investors provided specific allegations tied to individual defendants, writing, “Where plaintiffs have appropriately provided defendant-by-defendant particularity, the claims must remain.”

In a notable aside, Martinotti criticized the lack of clarity in the plaintiffs’ filings, remarking humorously, “Judges are not like pigs, hunting for truffles buried in briefs.”

Coinbase called the ruling a “significant step forward,” saying it would continue to “vigorously defend against any remaining claims.” Attorneys representing the shareholders did not immediately respond to media requests.

The case stems from major stock drops in 2022 and 2023, including a 26% plunge on May 11, 2022 after Coinbase reported disappointing revenues and added new risk disclosures, and a 12% drop on June 6, 2023 following the SEC lawsuit alleging the company operated as an unregistered securities exchange.

The class action, led by Swedish pension fund Sjunde AP-Fonden, covers investors who bought Coinbase shares between April 14, 2021, and June 5, 2023.

The SEC’s own case against Coinbase was dropped in February 2025, after the Trump administration moved to loosen federal oversight of the cryptocurrency sector, marking a major shift in the U.S. regulatory approach to digital assets.

The case is In re Coinbase Global Inc. Securities Litigation, U.S. District Court, District of New Jersey, No. 22-04915.

European Securities Regulator Warns Crypto Firms Against Misleading Customers on Regulation

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Europe’s securities regulator, the European Securities and Markets Authority (ESMA), issued a warning on Friday to crypto companies about misleading customers regarding the regulatory status of their products. The caution comes as European authorities intensify efforts to curb risks associated with crypto assets.

Under the EU’s new crypto regulation framework, known as MiCA, a series of investor protections are in place, including rules on safeguarding client assets and managing complaints. However, ESMA highlighted concerns over crypto asset service providers (CASPs) offering both regulated and unregulated products on the same platform, which poses risks to investors who may not clearly understand which products fall under MiCA’s protections.

ESMA pointed out that some CASPs might exploit their regulated status as a marketing tool, potentially confusing customers about which services are regulated. The regulator stressed that firms must not use their MiCA licensing as a promotional device or suggest that all crypto offerings are covered by the EU’s rules when they are not.

Products outside MiCA’s regulatory scope include direct investments in commodities like gold and crypto lending services.

The move follows global regulatory concerns about crypto investor risks, especially after the collapse of major crypto platforms such as FTX in 2022, which resulted in significant investor losses.

MiCA requires companies offering crypto services to obtain a license from national regulators, enabling them to operate across the EU. ESMA also issued guidance on the knowledge and competence standards that staff should meet to properly assess crypto companies.

ESMA’s warning coincides with the release of a peer review on Malta’s licensing process for crypto firms. The review found that while Malta’s Financial Services Authority has sufficient expertise and resources, its authorization procedures only “partially” met expected standards. Malta defended its role as an early adopter of digital asset regulation but did not directly respond to ESMA’s critique.

Concerns have been raised behind closed doors about the rapid pace at which some EU member states grant crypto licenses, according to previous Reuters reports.