ESMA warns growing crypto ties could amplify risks to traditional finance

Europe’s securities watchdog has urged closer surveillance of the expanding ties between crypto markets and traditional finance, warning that those connections could increase the potential for shocks to spread across the financial system. ESMA set out the concerns in its most recent risk monitoring report, arguing that links between vulnerable crypto-asset markets and mainstream finance merit heightened attention. The report highlights tokenized equities as an area worth watching. While tokenized shares remain small relative to global stock markets today, ESMA said their uptake is growing and could introduce new participants and infrastructure that change market structure and create novel channels of contagion. Decentralized finance vulnerabilities, including recent exploits, were also cited as mechanisms that could deepen interconnections between crypto and traditional markets. ESMA additionally identified prediction markets as an emerging risk. The regulator warned that crypto-denominated activity in these markets can complicate efforts to detect insider trading, wash trades and coordinated manipulation, raising market-integrity concerns as such platforms expand. The warning comes amid an intensifying regulatory fight over prediction markets in the United States. The Commodity Futures Trading Commission has issued guidance throughout 2026 asserting its exclusive jurisdiction over certain event contracts and has sued several states—Kentucky, Minnesota, New Mexico, New York, Illinois and Connecticut—that sought to apply state gambling laws to operators. On September 2, New Jersey petitioned the U.S. Supreme Court to rule on whether states may enforce sports gambling laws against prediction markets registered with the CFTC; at least 20 states have seen related litigation. A future court decision could determine whether state or federal authorities hold primary oversight of these platforms.