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ESMA warns growing crypto ties could amplify risks to traditional finance
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- DeepHorus
Europe's securities regulator warned that deepening crypto ties could amplify risks to traditional finance. In a Thursday report, the European Securities and Markets Authority (ESMA) called for monitoring the 'growing linkage between increasingly vulnerable crypto-asset markets and the broader financial system.' It highlighted tokenized equities and DeFi exploits as key concerns.
ESMA noted tokenized equities remain negligible compared with global stock markets but are gaining traction, introducing new participants and infrastructure that could reshape market structure. It also flagged prediction markets as an emerging risk, citing concerns around insider trading and market manipulation. Crypto use can make it harder to detect insider trading, wash trading, and coordinated manipulation in these markets.
The warning comes as prediction markets face a regulatory battle in the US. The Commodity Futures Trading Commission (CFTC) has issued guidance throughout 2026 while defending its exclusive jurisdiction over federally regulated event contracts. It has sued Kentucky, Minnesota, New Mexico, New York, Illinois, and Connecticut over state gambling laws.
On September 2, New Jersey officials petitioned the US Supreme Court to decide whether states can enforce sports gambling laws against CFTC-registered prediction markets. Litigation has spread across at least 20 states. The dispute could ultimately reach the Supreme Court, though whether it will take up the issue remains unclear.
ESMA warned that growing ties between crypto and traditional finance could increase the potential for financial spillovers. Tokenized equities, while still small, could eventually reshape market structure. Prediction markets pose unique regulatory challenges because blockchain-based trading can obscure detection of abusive practices.
A future Supreme Court ruling could determine whether state or federal authorities have jurisdiction over prediction markets. ESMA's report signals that European regulators are closely watching these developments and emphasized the need for continued monitoring. As tokenization and prediction markets grow, regulatory clarity will become increasingly important.
