ESMA Warns That Growing Crypto-Ties Could Amplify Risks to Traditional Finance
Europe’s financial market watchdog, ESMA, highlighted in its latest report that increasingly close ties between the crypto sector—including tokenized equities and DeFi projects—and traditional finance could raise the risk of shocks spreading across the wider system. The report specifically flagged emerging risks from prediction markets, where crypto usage complicates detection of market manipulation and insider trading.
Increasing Links Between Crypto and Traditional Assets
In its report published Thursday, ESMA emphasized the need for closer monitoring of growing linkages between the vulnerable crypto-asset markets and the broader financial system. The regulator noted that while tokenized equities remain negligible compared to the global stock market, they are gaining traction. This introduction of new participants and infrastructure may reshape market structure and deepen interconnections with traditional financial instruments.
According to ESMA, such developments could create conditions for risks to penetrate more deeply between crypto and traditional finance, increasing the potential for financial spillovers and systemic shocks.
Risks Associated with Prediction Markets
ESMA highlighted prediction markets as an emerging risk area. The use of cryptocurrencies within these platforms complicates the detection of insider trading, wash trading, and coordinated market manipulation. The regulator expressed concerns that weak oversight mechanisms in this space could undermine market integrity and amplify financial risks.
Notably, this issue has also gained prominence beyond Europe, particularly in the United States, where regulatory disputes over prediction markets are intensifying.
Regulatory Battle Over Prediction Markets in the US
In the United States, prediction markets face increasing regulatory challenges over whether event contracts fall under federal derivatives law or state gambling rules.
Throughout 2026, the Commodity Futures Trading Commission (CFTC) issued guidance concerning prediction markets, defending its exclusive jurisdiction over federally regulated event contracts.
In the course of asserting authority, the CFTC has sued several states—including Kentucky, Minnesota, New Mexico, New York, Illinois, and Connecticut—after those states sought to apply their gambling laws to prediction market operators.
The dispute may ultimately be settled by the US Supreme Court: on September 2, New Jersey officials petitioned the Court to determine whether states can enforce sports gambling laws against prediction markets registered with the CFTC. Litigation on this issue is currently ongoing in at least 20 states, and a Supreme Court ruling could set a key precedent defining the jurisdictional boundaries between federal and state regulators in this sector.
Why it matters
This news is significant as it highlights the increasing interconnection between crypto markets and traditional finance, potentially heightening their mutual vulnerabilities to financial shocks. ESMA points to new financial instruments, such as tokenized equities and prediction markets, as emerging sources of systemic risk. Furthermore, the jurisdictional conflicts surrounding regulation of prediction markets in the US illustrate the complexity of integrating crypto innovations into the existing legal and financial frameworks. ESMA's findings serve as a warning against underestimating these new risks and emphasize the need for enhanced monitoring and regulatory oversight to mitigate potential negative impacts on financial market stability.
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