ESMA Warns Crypto Links Could Spread Shocks Across Traditional Finance
Key Takeaways
- •ESMA's latest risk monitoring report, published Thursday, calls for closer monitoring of the deepening ties between increasingly vulnerable crypto-asset markets and the broader financial system.
- •The regulator identified growing adoption of tokenized equities and recent decentralized finance exploits as developments that could strengthen crypto-traditional finance connections and raise the potential for financial spillovers.
- •Tokenized equities remain negligible relative to global stock markets but are gaining traction, and their expansion could introduce new participants and infrastructure that reshape market structure.
- •ESMA flagged prediction markets as an emerging risk, stating that the use of crypto makes insider trading, wash trading and coordinated market manipulation harder to detect.
- •In the United States, the CFTC has asserted exclusive jurisdiction over event contracts and sued six states, while New Jersey has petitioned the Supreme Court to decide whether state gambling laws can apply to CFTC-registered prediction markets.
The European Securities and Markets Authority (ESMA) has warned that growing links between crypto and traditional finance could increase the risk of shocks spreading across the broader financial system.
In its latest risk monitoring report, published Thursday, the European securities regulator called for closer monitoring of the “growing linkage between increasingly vulnerable crypto-asset markets and the broader financial system.” The ESMA report examines risk indicators for EU financial markets.
ESMA identified the growing adoption of tokenized equities and recent decentralized finance (DeFi) exploits as developments that could deepen connections between crypto and traditional markets. The regulator said those links could increase the potential for financial spillovers.
Tokenized equities remain negligible compared with global stock markets, ESMA said, but are gaining traction. Their expansion could introduce new participants and infrastructure and potentially reshape market structure. That makes the regulator’s focus relevant not only to crypto markets, but also to the systems and firms that could connect tokenized assets with established financial markets.
The regulator also flagged prediction markets as an emerging risk, citing heightened concerns about insider trading and market manipulation. ESMA said the use of crypto in prediction markets can make it more difficult to detect insider trading, wash trading and coordinated market manipulation. The issue therefore involves both the design of trading venues and the question of which authorities can oversee activity conducted through them.
Prediction markets face regulatory battle in the US
ESMA’s warning comes as prediction markets face a growing regulatory dispute in the United States over whether event contracts fall under federal derivatives law or state gambling rules.
The Commodity Futures Trading Commission (CFTC) has issued guidance for prediction markets throughout 2026 while defending what it says is its exclusive jurisdiction over federally regulated event contracts. The CFTC’s position is outlined in its official announcement.
The agency has also sued several states, including Kentucky, Minnesota, New Mexico, New York, Illinois and Connecticut, after authorities sought to apply state gambling laws to prediction market operators. Mike Selig was cited in the source material; his post on X is available online.
The dispute could ultimately reach the US Supreme Court. On September 2, New Jersey officials petitioned the court to decide whether states can enforce sports gambling laws against prediction markets registered with the CFTC, citing litigation over the issue across at least 20 states.
Whether the Supreme Court takes up the case remains unclear. A future ruling could determine whether state or federal authorities have jurisdiction over prediction markets.
