ESMA warns crypto links could amplify financial spillover risks

financial spillover risks — The European Securities and Markets Authority (ESMA) has warned that growing connections between crypto and traditional finance could increase the risk of shocks spreading across the broader financial system.

In a risk monitoring report published on September 10, the EU regulator called for closer monitoring of the “growing linkage between increasingly vulnerable crypto-asset markets and the broader financial system.” ESMA specifically flagged tokenized equities and recent decentralized finance (DeFi) exploits as areas that could deepen these links and increase the potential for financial spillovers.

The regulator noted that while tokenized equities remain negligible compared to global stock markets, their growing traction could introduce new participants and infrastructure that reshape market structure. ESMA also highlighted prediction markets as an emerging risk, warning that crypto use in these markets can make it harder to detect insider trading and market manipulation.

This warning comes as prediction markets face a growing regulatory battle in the United States over jurisdictional authority between the Commodity Futures Trading Commission and state gambling laws, with the dispute potentially heading to the Supreme Court.