OMFIF economist Mariam Khan made a persuasive case that tokenised sukuk could broaden access to sovereign finance, automate part of issuance and settlement and deepen local capital markets. Her argument raised a question that Europe cannot avoid as it builds its Savings and Investments Union: what happens when digitalisation makes a financial product easier to buy before it actually makes it easier to understand?
The fundamental question is whether technology alone can create better capital markets. In our view, the answer is no. Tokenisation can lower denominations and reduce transaction frictions, but it does not remove credit risk, liquidity risk or legal complexity. Markets develop when investors operate within stable legal frameworks, clear rules, trusted institutions and reliable market infrastructures. Blockchain can improve transaction efficiency, but it cannot replace the institutional foundations. Confidence is created by the rule of law, not by software.
Islamic finance shows that institutions matter more than technology
Tokenised sukuk offer a broader lesson. Islamic finance prohibits interest payments, yet continues to finance households, businesses and public investment through arrangements based on risk-sharing, asset ownership and trade. The legal architecture differs from conventional finance, but many underlying economic functions remain similar. Tokenisation may change how a sukuk is issued, distributed and settled, but it does not by itself determine what investors own, who bears losses or how claims are treated in insolvency.
Financial innovation is not necessarily about inventing entirely new economic functions. More often, it involves designing different legal and institutional frameworks to achieve similar objectives. For Europe, the priority is clear legal mapping of the issuer, the authoritative ownership record, settlement finality and the treatment in insolvency. Technology can automate a process only after institutions have defined the rights and obligations within it. The quality of institutions matters more than the sophistication of technology.
Europe risks confusing innovation with complexity
Over recent decades, financial markets have produced an ever-growing range of instruments, trading platforms, derivatives and increasingly sophisticated forms of intermediation. Every innovation is presented as progress, yet far less attention is paid to whether the system is becoming more efficient or simply more complex.
Europe’s DLT Pilot Regime, in force since March 2023, illustrates the implementation gap. By January 2026, the European Securities and Markets Authority listed six authorised distributed ledger technology market infrastructures and found that uptake was constrained by the novelty of the framework and complex regulatory, legal and operational requirements. Tokenisation may reduce settlement frictions, but these gains depend on interoperable infrastructure, reliable forms of settlement money, regulatory certainty and common standards. Digitalising fragmented markets without addressing fragmentation may reproduce the same barriers on a new layer.
Europe should not measure success by the number of assets placed on distributed ledgers. The real question is whether tokenisation makes ownership clearer, settlement safer and capital markets simpler, more transparent and more useful to the real economy. Innovation that adds further layers of complexity risks benefitting mainly sophisticated participants while making everyone else increasingly dependent on intermediaries and digital platforms.
Digitalisation without protection increases risk
Digitalisation has dramatically lowered the barriers to investing. Complex products can now be purchased in just a few clicks through platforms designed to make investing appear simple, immediate and attractive. However, ease of access should not be confused with understanding risk. Only 18% of European Union citizens have a high level of financial literacy. Meanwhile, professional investors, algorithmic traders and institutions possess analytical and technological resources far beyond those of ordinary retail investors.
Regulation should therefore go beyond promoting financial literacy alone. Education is essential, but not always sufficient. Investor protection also requires recognising that not every financial product should be distributed to every retail investor without robust appropriateness and suitability safeguards. Particularly complex instruments should be subject to stronger appropriateness and suitability requirements and, when necessary, distribution limits. Protecting investors is not about restricting economic freedom; it is about ensuring that innovation does not become an advantage enjoyed exclusively by those who already possess superior knowledge, technology and market power.
Real innovation means simplification
The debate surrounding tokenised sukuk reminds Europe that technology is a tool, not an objective. The success of the SIU will not be determined by how many assets become tokenised, but by whether tokenisation builds more integrated, transparent and trustworthy markets.
If digitalisation merely creates more products, platforms and complexity, Europe will have digitalised its problems. If it simplifies markets, strengthens confidence and reconnects finance with the real economy, it will represent genuine innovation. That is the challenge Europe should address long before asking what the next disruptive financial technology will be.
Luigi Capoani is an economist, researcher, and lecturer in international economics at Ca’ Foscari University of Venice. Marta Bisol is an analyst at the European Youth Think Tank.
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