Tokenization using distributed ledger technology (DLT) offers Europe an opportunity to develop more integrated digital capital markets and address the fragmentation of traditional financial infrastructure, the European Central Bank (ECB) said in an April 13 Macroprudential Bulletin article.
The bank believes this transition has the potential to support the goals of the EU’s Savings and Investment Union by improving liquidity, reducing costs and strengthening capital allocation, while strengthening monetary sovereignty through euro-denominated assets and European governance.
A small but rapidly growing market
Tokenized finance is still small-scale but rapidly expanding. Although tokenized finance is still relatively small, it is expanding rapidly. The global market reached approximately 38 billion euros in February 2026, up from 7.4 billion euros at the beginning of 2024.
Money market funds and bonds have seen the greatest growth, with limited activity in stocks and real estate. However, distribution transactions remain thin.
According to the ECB, much of the appeal revolves around how the technology can simplify processes across the lifecycle of financial assets. Features such as programmable transactions, fractional ownership, and instant settlement have the potential to reduce issuance costs, automate parts of trading, and eliminate friction in clearing and settlement.
Over time, record sharing may also streamline storage and asset servicing.
Four conditions for scale-up
While there is a lot of promise around tokenization, the ECB warns that the benefits will take time to materialize and depend on the level of adoption and market liquidity. The biggest gains are likely to be made in areas where assets are currently less standardized.
In order to scale up tokenization, central banks have pointed out several gaps that still need to be addressed.
One is that central bank money is available on-chain. The Eurosystem’s Pontes project is scheduled to launch in the third quarter of 2026 and is designed to allow transactions on a distributed ledger to be settled in central bank money.
The other is interoperability. Without this, the ECB warns, tokenized markets risk evolving into isolated platforms rather than integrated systems. The Appia Project aims to lay the foundations for a more integrated European framework by 2028.
It is also important to develop an active secondary market. Currently, trading restrictions are hampering price discovery and investor participation, which is one of the main constraints to growth.
Regulation remains another challenge, the bank says. While initiatives such as the EU’s DLT pilot scheme and national frameworks in countries such as Germany and France have made progress, differences between jurisdictions continue to complicate cross-border activities.
The ECB emphasizes the need for a more unified framework to support European tokenized financial markets.
As stated in the article, “A collaborative approach to removing such barriers will be the best solution to ensure a level playing field and unlock the potential for expanding DLT across Europe.” “Further harmonization of company and securities law will facilitate the cross-border issuance, holding and settlement of securities issued by companies across the EU, and will also help develop a tokenization market in Europe.”
risks remain
The central bank also highlighted various risks associated with tokenization, including potential liquidity mismatches, increased leverage due to interconnected platforms, and operational vulnerabilities associated with smart contracts.
Challenges can also arise during the transition period when both traditional and tokenized systems run in parallel.
The ECB’s message is that the opportunity is real, but not guaranteed. Achieving this will depend on how quickly Europe can build the necessary infrastructure, deepen its markets and harmonize its regulatory framework.
