Tokenization using distributed ledger technology (DLT) offers Europe an opportunity to develop a more integrated digital capital market and address fragmentation in traditional financial infrastructure, said the European Central Bank (ECB) in a Macroprudential Bulletin article published on April 13.

The bank believes the shift could support the EU’s Savings and Investments Union agenda by improving liquidity, reducing costs and enhancing capital allocation, while reinforcing monetary sovereignty through euro-denominated assets and European governance.

A small but fast-growing market

Tokenized finance is still small but is expanding quickly. While still relatively small, tokenized finance is expanding quickly. The global market reached about €38 billion in February 2026, up from €7.4 billion in early 2024.

Growth has been strongest in money market funds and bonds, with more limited but increasing activity in equities and real estate. Secondary trading, however, remains thin.

According to the ECB, much of the appeal revolves around how the technology could simplify processes across the lifecycle of financial assets. Features such as programmable transactions, fractional ownership and instant settlement could reduce issuance costs, automate parts of trading and remove frictions in clearing and settlement.

Over time, shared records could also streamline custody and asset servicing.

Four conditions for scaling up

Tokenization holds many promises, however, the ECB cautions that the benefits will take time to materialize and depend on the level of adoption and deep market liquidity. The biggest gains are likely in areas where assets are less standardized today.

To scale up tokenization, the central bank pointed to several gaps that still need to be addressed.

One is the availability of central bank money on-chain. The Eurosystem’s Pontes project, expected to launch in the third quarter of 2026, is designed to allow transactions on distributed ledgers to settle in central bank money.

Another is interoperability. Without it, tokenised markets risk developing into isolated platforms rather than a unified system, the ECB warns. The Appia project aims to lay the groundwork for a more integrated European framework by 2028.

Developing active secondary markets is also critical. Limited trading today holds back price discovery and investor participation, making this one of the main constraints on growth.

Regulation remains another sticking point, the bank says. While initiatives such as the EU’s DLT Pilot Regime and national frameworks in countries like Germany and France have made progress, differences across jurisdictions continue to complicate cross-border activity.

The ECB stresses the need for a more unified framework to support tokenized financial markets in Europe.

“A coordinated approach to removing such barriers would be the best solution to ensure a level playing field and unlock the potential for scaling DLT across Europe,” as noted in the article. “Further harmonization of corporate and securities law would facilitate the cross-border issuance, holding and settlement of the securities that corporates issue across the EU and would also aid the development of tokenized markets in Europe.”

Risks remain

The central bank also highlights a range of risks associated with tokenization, including the potential for liquidity mismatches, higher leverage through interconnected platforms, and operational vulnerabilities linked to smart contracts.

The transition period, with both traditional and tokenised systems running in parallel, could also present challenges.

The ECB’s message is that the opportunity is real, but not guaranteed. Delivering on it will depend on how quickly Europe can build the necessary infrastructure, deepen markets and harmonize its regulatory framework.