ESMA warns growing crypto ties could amplify risks to traditional finance

Europe’s securities regulator, the European Securities and Markets Authority (ESMA), has highlighted the increasing connections between crypto‑asset markets and the traditional financial system as a source of potential systemic risk.

Tokenized equities under scrutiny

ESMA notes that while tokenized equities remain a small fraction of global stock markets, their adoption is rising. The regulator warns that new participants and infrastructure associated with tokenized shares could alter market structures and create pathways for risk transmission.

DeFi exploits raise spillover concerns

Recent incidents of exploitation in decentralized finance (DeFi) platforms are cited as examples of how vulnerabilities in crypto markets could spill over into broader finance, amplifying shocks.

Prediction markets identified as emerging risk

Prediction markets that use crypto assets are flagged for heightened concerns about insider trading, wash trading and coordinated manipulation. The regulator points out that crypto‑based prediction markets can make detection of such activities more difficult.

Regulatory context in the United States

ESMA’s warning coincides with ongoing regulatory battles in the United States over whether event contracts on prediction markets fall under federal derivatives law or state gambling rules. The U.S. Commodity Futures Trading Commission (CFTC) has issued guidance and pursued legal action against several states, and the issue may ultimately be decided by the Supreme Court.