Europe’s securities regulator has warned that the growing links between crypto and traditional money could raise the risk of shocks across the wider financial system.
In its latest risk monitoring Report Published on Thursday, the European Securities and Markets Authority (ESMA) called for closer monitoring of the “increasingly vulnerable crypto-asset market and the growing link between the broader financial system”.
ESMA pointed to the growing adoption of tokenized equity and recent decentralized finance (DeFi) exploits that could deepen the relationship between crypto and traditional markets and increase the potential for financial spillovers.
ESMA Risk Indicators for EU Financial Markets. Source: SMA
The regulator said tokenized equities remain insignificant compared to global stock markets but are gaining traction, potentially introducing new participants and infrastructure that could reshape market structures.
ESMA has also flagged the prediction market as an emerging risk, warning of heightened concerns around insider trading and market manipulation. The regulator said the use of crypto in the prediction market could make it difficult to detect insider trading, wash trading and concerted market manipulation.
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The prediction market faces regulatory battles in the US
ESMA’s warning comes as forecast markets face a growing regulatory battle in the US over whether event contracts fall under federal derivatives laws or state gambling rules.
Issued by the Commodity Futures Trading Commission (CFTC). guidelines It has exclusive jurisdiction over federally regulated event contracts while protecting what it says is for the prediction market through 2026.
Source: Mike Selig
The agency has sued several states, including Kentucky, Minnesota, New Mexico, New York, Illinois and Connecticut, after authorities tried to enforce state gambling laws on prediction market operators.
The dispute may eventually 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 cases on the issue in at least 20 states.
It remains unclear whether the Supreme Court will take up the issue, but a future ruling could determine whether state or federal authorities have jurisdiction over prediction markets.
