Tokenisation has long been framed as transformational for asset management. In Europe, however, the story unfolding is more about adaptation — a gradual layering of new infrastructure onto existing regulatory and operational frameworks.
At the heart of this shift is a distinction: onchain systems are not replacing funds, but reshaping how they function. Faustine Fleuret, head of public affairs at onchain lending network Morpho, points to protocols such as Morpho as an example. Morpho Vault, she explains, “operates as a non-custodial smart contract protocol rather than a regulated fund or manager under the Alternative Investment Fund Managers Directive or Ucits”, acting instead as “an infrastructure layer on top of which companies can create interfaces and/or provide services”.
Rather than attempting to fit decentralised finance into existing fund categories, asset managers are exploring how programmable infrastructure can sit alongside them. This means retaining familiar structures — Ucits, AIFs and segregated mandates — while embedding elements of automation, transparency and speed into the underlying processes.
Morpho’s design shows how this hybrid model is shaping up. Vault parameters such as asset eligibility, allocation logic and exposure caps are encoded directly onchain, while discretion is limited by predefined rules and timelock protections. The protocol does not take custody of assets and “cannot unilaterally freeze or reassign user funds”, leaving regulated entities responsible for safekeeping. All positions, exposures and allocation changes are recorded onchain in a machine-readable format, supporting independent valuation, reconciliation and risk monitoring.
Governance and risk controls are also embedded into the architecture. Responsibilities are split across roles such as owner, curator, allocator and sentinel, while sensitive changes are subject to timelock mechanisms, providing transparency. At the same time, front-end controls such as blockchain analytics screening and geofencing aim to support compliance with financial crime requirements, alongside ongoing investment in smart contract security through audits and bug bounty programmes.
“From a supervisory perspective, tokenisation is generally understood as a new way of representing existing rights and obligations, rather than the creation of a new asset class.”- Esma
For regulators, this distinction is essential. The European Securities and Markets Authority (Esma) clarifies that tokenisation is “a new way of representing existing rights and obligations, rather than the creation of a new asset class”. In other words, the underlying regulatory objectives remain unchanged. Investor protection, governance, asset safekeeping and operational resilience continue to anchor the European approach.
Esma says it is “closely monitoring” the development of tokenisation and broader digitalisation across EU financial markets, including its potential application in the investment funds sector.
The challenge lies not in principle but in practice. As Esma points out, tokenisation raises questions about how financial markets operate. How are investor rights evidenced? Who maintains records and registers? How are responsibilities distributed across the value chain? And critically, how do settlement systems — including the “cash leg” — function in a tokenised environment? Questions around interoperability between systems also remain a key consideration.
These questions go to the core of what many in the industry describe as “market plumbing”. They are less visible than headline innovations, but are more important in determining whether tokenisation can scale within institutional portfolios.
For asset managers, the appeal of onchain systems could be tangible. Fleuret says there are measurable gains in credit strategies deployed onchain, especially in efficiency and capital deployment. By moving servicing, settlement and administrative processes onto blockchain frameworks, managers can cut operational costs and shorten settlement cycles, supporting stronger net yields.
Speed is another advantage. Near-instant settlement and programmable cash flows increase capital velocity, allowing funds to redeploy assets far more quickly than in traditional credit markets, where reconciliations can take days. At the same time, transparency improves. Onchain systems provide real-time visibility into collateral, exposures and cash flows, strengthening risk monitoring and giving investors clearer insight into portfolio performance.
“Onchain systems are not replacing funds, but reshaping how they function.”-Faustine Fleuret, global head of public affairs, Morpho
Smart contracts can execute covenant checks and payment waterfalls without manual intervention, reducing operational risk and back-office burden. Tokenisation also opens the door to broader distribution, as fractionalisation lowers minimum ticket sizes and enables access for smaller institutions and family offices.
Still, the industry remains in the early stages of adoption. Fleuret describes institutional uptake as “still largely in an exploratory and pilot phase”, with more rapid progress seen in the US and parts of Asia. Europe, by contrast, is moving cautiously, even as the shift towards tokenised infrastructure is increasingly viewed as structural.
Recent developments point to growing institutional engagement, with firms such as Bitwise Asset Management beginning to deploy capital into non-custodial, onchain lending strategies built on infrastructure like Morpho.
She adds that regulatory clarity will ultimately determine how quickly adoption scales, particularly for institutions integrating decentralised protocols within existing compliance frameworks. Jurisdictions that move faster to provide clear guidance and support institutional education are likely to shape leadership in onchain finance.
While the technology itself is global, its implementation must align with national rules, supervisory expectations and operational norms that vary significantly across jurisdictions.
As a result, a hybrid model is emerging. Rather than replacing traditional fund structures, onchain systems are being integrated as a complementary layer. Smart contracts handle allocation, execution and settlement, while regulated entities retain custody, governance and client oversight. This allows institutions to experiment with programmability without stepping outside established compliance frameworks, says Fleuret.
“Europe’s Ucits and AIF structures will remain competitive only if regulators pair their strong investor protections with the flexibility and speed needed to support these new operating models.”- Debbie Cunningham, CIO, global liquidity markets at Federated Hermes
Would this incremental approach allow Europe to keep pace globally? Debbie Cunningham, CIO of global liquidity markets at Federated Hermes, sees both opportunity and risk. “Europe’s Ucits and AIF structures will remain competitive only if regulators pair their strong investor protections with the flexibility and speed needed to support these new operating models.”
Europe’s strengths are clear. Cunningham points to “clear regulatory frameworks around tokenisation, data standards, and investor protection” as a foundation for leadership. Yet she also warns that the region’s regulatory processes can sometimes become “overly bureaucratic, compliance heavy, or slow and opaque”, potentially slowing innovation and discouraging capital formation.
She adds that experience with innovation sandboxes across several European jurisdictions suggests that well-intended frameworks can sometimes hinder rather than accelerate progress. This is particularly the case when processes become too complex. Jurisdictions such as France, Luxembourg and Switzerland have moved proactively to adapt their rules and support digital fund technologies. But scaling these initiatives across the EU remains a challenge, particularly where national approaches diverge, adds Cunningham. She adds that closer collaboration between industry and regulators will be key to accelerating pilot programmes and streamlining implementation within existing frameworks.
By working with national competent authorities to assess how existing frameworks apply to new models, Esma is seeking to avoid fragmentation while maintaining high standards of investor protection. “Where relevant, Esma may publish analytical work or supervisory guidance, whilst noting that any changes to the regulatory framework would be for EU legislators to consider,” says the regulator.
For now, tokenisation is not ushering in a parallel financial system; it is gradually reshaping the infrastructure that underpins existing markets. The shift is less about replacing what exists and more about enhancing how it operates.
