The Regulatory Hurdles of Tokenized ETFs in the US & Europe.

Introduction — why tokenized ETFs matter (and why regulation matters more)

Tokenized ETFs — exchange-traded funds whose shares (or share-representations) exist as tokens on a blockchain — promise faster settlement, 24/7 tradability, fractional ownership and potentially lower costs. Major incumbents and market infrastructure players are now experimenting in earnest: Nasdaq has filed to trade tokenized securities, large asset managers are publicly exploring tokenized ETF share issuance, and banks are piloting tokenized money-market and Treasury products. These industry moves highlight an important shift from experiment to possible mainstream adoption — but the legal and regulatory pathway is complex, divergent across jurisdictions, and still incomplete. 

This article explains the main regulatory hurdles tokenized ETFs face in the United States and Europe, compares how the two jurisdictions are approaching the problem, and gives practical takeaways for asset managers, custodians, exchanges and regulated service providers thinking about tokenized fund products in 2025.

1) What exactly is a “tokenized ETF”? (short primer)

A tokenized ETF can mean different things in practice: A fully regulated ETF whose shares are also issued in token form on a blockchain (token = digital representation of the ETF share). A private/institutional tokenized fund where a blockchain ledger mirrors ownership but primary legal records are kept off-chain. New structures that combine token economics (for example, programmable distributions or fractional trading) with traditional fund mechanics. The regulatory issues depend heavily on structure: whether the token is treated as a security, whether trading occurs on an authorized market, how custody and redemption/creation processes work, and which entity is legally responsible for investor protections.

2) Big-picture regulatory differences: US vs Europe (what’s already changed in 2024–2025)

United States — cautious but opening. U.S. regulators (notably the SEC) have historically regulated ETFs and securities under established securities laws. In 2024–2025 the regulatory posture shifted pragmatically: crypto-asset ETPs saw notable approvals and the SEC has taken steps to facilitate operational mechanics (for example permitting in-kind creations/redemptions for certain crypto ETPs), while exchanges and market operators have engaged with the SEC on tokenized securities rule filings. That said, the SEC still requires that listings, secondary trading, custody, broker-dealer involvement and market-making satisfy existing securities rules — and tokenized trading venues must meet exchange and market-structure requirements.  Europe — rulebook creating clarity (MiCA)

The European Union implemented the Markets in Crypto-Assets Regulation (MiCA) to create a single rulebook for many crypto-assets and service providers. MiCA (fully applicable as of late 2024/early 2025) sets authorization, disclosure, conduct and prudential requirements for issuers and crypto-asset service providers (CASPs). For tokenized ETFs, MiCA helps by clarifying when a token is a regulated crypto-asset (such as asset-referenced tokens or e-money tokens) and by imposing obligations on issuers and custodians — but MiCA was not drafted specifically for tokenized securities that replicate regulated investment products governed under the UCITS/AIFMD/Prospectus regime. That creates overlap and complexity that market participants must navigate. 

3) The five core regulatory hurdles (detailed)

A. Legal characterization: is the token a security, a crypto-asset, or a bookkeeping mirror? Regulatory treatment — and which rulebook applies — depends on legal characterization. If a token is deemed a “security” under U.S. law, it falls squarely under the SEC and Exchange Act requirements; if it is an asset-referenced or e-money token under MiCA, it follows MiCA’s rules. Many tokenized ETF pilots aim to treat on-chain tokens as mirrors of off-chain fund shares (i.e., the legal share register remains with the fund administrator), but that “mirror” approach still raises questions: which record is legally authoritative, how is reconciliation handled, and which regime governs disputes? Regulators are scrutinising these design choices because legal certainty matters for investor protection and for clearing/settlement finality.  Why it matters: different classification → different licensing, disclosure, custody and capital rules.

B. Custody, safekeeping and segregation of assets

Traditional ETFs rely on regulated custodians and well-defined custody chains. Tokenized ETFs introduce new custody vectors (on-chain wallets, smart-contract keystores, multi-party computation custody) that must meet regulatory standards for safekeeping and segregation. European regulators under MiCA and other supervisory guidance require clear custody rules for asset-referenced tokens and for CASPs; in the U.S., the SEC and prudential supervisors expect strong controls, qualified custody solutions, and clarity whether tokens are held by qualified custodians or by crypto exchanges. Recent pilots (e.g., tokenized Treasuries and money-market tokens) still retain parallel traditional custody records, showing how cautious institutions are being to maintain regulatory comfort.  Practical challenge: on-chain custody technologies must be mapped to legal custody obligations and insured where appropriate — a nontrivial engineering + legal exercise.

C. Market-structure and trading venue rules (listing, marketplace supervision, fair access)

Tokenized shares traded on a blockchain could theoretically trade 24/7. But under securities laws, exchanges and alternative trading systems must meet market-structure rules designed to ensure transparency, market surveillance, market-maker obligations, and investor protections. In the U.S., market operators (e.g., Nasdaq) are pursuing rule changes with the SEC to allow tokenized securities on regulated order books; the SEC’s acceptance (or conditions on acceptance) will determine whether tokenized ETF shares can trade on exchange order books in a way that satisfies existing market-structure rules. In Europe, trading venues must ensure MiFID and related obligations when listing regulated investment products. The regulatory question: can tokenized trading venues provide the same surveillance, transparency and investor protections as traditional exchanges? 

D. Creation/redemption mechanics, settlement finality, and liquidity provisioning

ETFs rely on in-kind creation/redemption processes to keep market price aligned with NAV. Tokenized ETFs need legally robust mechanisms for creation/redemption that regulators accept. For crypto ETPs, the SEC has taken steps to permit in-kind creations/redemptions for some products — an important precedent — but tokenization adds technical complexities (atomic swaps, cross-chain settlement, on-chain minting/burning tied to off-chain NAV calculations). Ensuring settlement finality (i.e., when is ownership legally transferred?) is a vital regulatory concern because finality affects counterparty risk, insolvency treatment and capital calculations.  Example figure: institutional pilots show tokenized U.S. Treasuries and equivalents of around $6.75 billion in tokenized balances in controlled institutional systems — demonstrating both interest and the conservative, custody-mirror approach used so far. 

E. Investor protection, disclosures and anti-money-laundering (AML) / KYC. Regulators require clear investor disclosures, prospectuses, risk warnings, and strong AML/KYC. Tokenized products present new friction points: how to deliver mandatory disclosures on-chain, how to ensure off-chain legal recourse for token holders, and how to conduct KYC/AML in pseudonymous environments. MiCA imposes publication, disclosure and governance obligations on issuers and CASPs; U.S. securities laws impose prospectus and registration requirements unless an exemption applies. Firms must therefore design tokenization products that satisfy prospectus/regulatory filing rules and robust AML/KYC procedures. 

4) How regulators are responding — examples & recent developments (2024–2025)

Europe: MiCA provides a framework — but not a full answer for tokenized securities MiCA creates a comprehensive rulebook for crypto-assets, CASPs and token issuers in the EU and came into effect in late 2024/early 2025. It clarifies obligations for asset-referenced tokens (ARTs), e-money tokens (EMTs) and CASPs — which is helpful for tokenized funds that use token classes covered by MiCA. However, tokenized ETF shares that are functionally securities will still be subject to prospectus rules, UCITS/AIFMD rules and national competent authority oversight — producing overlap that requires careful legal design and supervisory coordination.  United States: piecemeal but constructive steps. U.S. authorities remain focused on applying existing securities and commodities laws to novel token formats. The SEC’s July 2025 decision to permit in-kind creations and redemptions for certain crypto ETPs eased a major operational hurdle for crypto ETPs and shows pragmatic movement toward accommodating tokenized mechanisms — yet full approval for tokenized trading and broader tokenized ETF issuance remains under close regulatory scrutiny. Separately, Nasdaq and other market operators are actively engaging the SEC on tokenized securities listing and trading rules, signaling constructive dialogue even as the SEC evaluates compliance with core investor-protection statutes. 

5) Market & industry signals (why asset managers are experimenting now)

Crypto and digital-asset ETPs saw major inflows in 2025; for example, by August 2025 U.S. listings and related ETPs held tens of billions of dollars in assets, indicating investor demand and scale. Rapid adoption of crypto ETPs has motivated incumbents to explore tokenization beyond crypto exposure — for treasuries, money-market funds and ETFs — to capture efficiencies.  Major players (BlackRock, Goldman Sachs, BNY Mellon, Nasdaq) are running pilots or filing rule changes — a sign that the industry is preparing infrastructure and legal structures before full retail rollout. These pilots are typically conservative: tokens mirror off-chain records and operate in closed, compliant ecosystems before any open trading is allowed. 

6) Practical legal & compliance checklist for firms planning tokenized ETFs

1. Determine legal form — token as legal record or mirror? Draft governing documentation that states the authoritative record.

2. Engage early with regulators — pre-filings, rule-change consultations, and sandbox participation reduce risk.

3. Custody design & insurance — map on-chain custody to regulated custodial standards and procurement of insurance where possible.

4. Market-structure compliance — ensure trading venues meet exchange/MTF/OTF rules applicable to securities in the jurisdiction.

5. Creation/redemption lawfulness — design legally compliant in-kind or cash creation/redemption processes and document settlement finality.

6. AML/KYC & disclosure — build robust, auditable KYC/AML workflows and ensure regulatory prospectuses and investor disclosures are updated for tokenized mechanics.

7. Operational resilience & smart-contract audit — technical audits, fail-safes and governance over token-minting smart contracts.

8. Cross-border planning — multi-jurisdiction products require harmonised compliance (MiCA vs US SEC rules) and careful domicile choices.

7) Open questions & policy risks to watch

Regulatory fragmentation risk: if jurisdictions diverge on token classification and market access rules, cross-border tokenized ETFs may face legal arbitrage or be forced into jurisdictional silos.

Enforcement & redress: how will investor remedies work when tokens are held across chains and counterparties are international?Systemic risk & liquidity: tokenized trading could concentrate liquidity in new venues; regulators will watch whether tokenized markets amplify volatility or create new settlement-based contagion channels. Tax & accounting treatment: tokenized presence could raise questions on stamp taxes, transfer taxes, and accounting recognition — areas that often lag regulatory clarity.

8) Conclusion — cautious optimism with heavy compliance burdens

Tokenized ETFs offer operational and market-structure advantages that large incumbents and exchanges are eager to test. Europe’s MiCA provides an important regulatory scaffold for many crypto assets, while the U.S. has taken tactical steps that demonstrate pragmatism. However, tokenized ETFs create layered legal questions (security vs crypto characterization), custody and settlement challenges, and market-structure obligations that regulators will insist on seeing resolved before broad retail rollouts. The market is moving from pilots to production, but institutional players must navigate regulatory complexity, align legal documentation to on-chain mechanics, and work closely with supervisors to make tokenized ETFs a durable, compliant part of mainstream finance. 

Sources & further reading (selected) Markets in Crypto-Assets Regulation (MiCA) — European Securities and Markets Authority (ESMA).  SEC press release: SEC permits in-kind creations and redemptions for crypto ETPs (July 29, 2025). Nasdaq rule filing and reporting on tokenized securities (2025).  BlackRock tokenization reporting & industry coverage (Sept 2025). 

Investopedia / industry reporting on tokenized money market & Treasury pilots (2025).  World Economic Forum: Asset Tokenization in Financial Markets (2025 report).