ESMA flags risks from tokenized equities and prediction markets

The European Securities and Markets Authority (ESMA) issued its second risk‑monitoring report of 2026, highlighting how tighter connections between crypto‑based products and conventional finance may transmit market stress.

Rapid growth of tokenized equities

Tokenized equity value rose from about €0.3 billion at the end of 2024 to roughly €1.9 billion by June 2026, a six‑fold increase. Most activity is concentrated in large U.S. technology stocks and is driven by wrapped stock tokens, which give holders economic exposure without changing the legal shareholder register.

ESMA notes that this hybrid structure – on‑chain token transfers paired with off‑chain cash settlements – can fragment liquidity, complicate price discovery and create dependencies on custodial platforms.

Prediction‑market volumes and conduct concerns

Quarterly trading volumes reached about $12 billion on Polymarket and $8.8 billion on Kalshi in Q4 2025. While Polymarket operates on‑chain with centralized administration, Kalshi is a CFTC‑regulated designated contract market.

The regulator warns that pseudonymous accounts and the ability to bypass geographic restrictions make it harder to detect insider dealing, wash trades and coordinated manipulation. Recent examples include newly created wallets earning $1.2 million shortly before a geopolitical event became public.

DeFi and smart‑contract risks

Tokenized equities can be used as collateral in decentralized finance protocols, exposing them to smart‑contract bugs. Errors in code may cause incorrect transfers or irreversible ownership misallocations.

Regulatory outlook

ESMA classifies market, contagion and operational risks from these crypto‑linked activities at the highest level, while credit risk remains high and environmental risk is medium. The agency calls for continued monitoring as tokenized products and prediction markets expand, citing ongoing pilots under the EU’s DLT Pilot Regime and emerging national frameworks such as Malta’s proposal for a dedicated prediction‑market regime.