ESMA Warns Deeper Crypto-Traditional Finance Links Raise Spillover Risk

The European Securities and Markets Authority, the European Union’s securities watchdog, warned that the rapidly expanding overlap between crypto markets and traditional finance is increasing the risk that shocks in one market could spread to the other.

Cointelegraph reported on September 10 that ESMA, in a recent risk monitoring report, stressed the need to closely monitor whether vulnerabilities in crypto markets could spill over into the traditional financial system. As crypto assets become more integrated into mainstream finance, those linkages could emerge as a new source of financial stability risk.

ESMA cited growth in the tokenized stock market and hacks in decentralized finance, or DeFi, as leading risk factors. Tokenized equities remain small relative to global stock markets, but their rapid growth could encourage the entry of new firms and trading infrastructure, potentially affecting existing market structures.

The agency also urged caution over crypto-based prediction markets. If trading shifts on-chain, detecting unfair trading practices such as insider trading, wash trading and coordinated price manipulation could become significantly more complex, ESMA said.

The regulatory debate over prediction markets is also continuing in the US. The Commodity Futures Trading Commission has maintained that such products fall under federal derivatives rules, while some state governments are seeking to apply their own gambling laws. Legal disputes are under way in at least 20 states, including Kentucky, Minnesota, New Mexico, New York, Illinois and Connecticut. New Jersey on September 2 filed a petition with the US Supreme Court seeking a ruling on the scope of state regulatory authority.