Europe’s securities regulator has warned that stronger ties between crypto and traditional finance could raise the risk of shocks spreading through the broader financial system.
In its latest risk monitoring report published Thursday, the European Securities and Markets Authority (ESMA) called for closer monitoring of the 「growing linkage between increasingly vulnerable crypto-asset markets and the broader financial system」.
ESMA said growing adoption of tokenized equities and recent decentralized finance (DeFi) exploits are among the areas that could deepen links between crypto and traditional markets and increase the potential for financial spillovers.
Tokenized equities, DeFi and prediction markets were highlighted
The regulator said tokenized equities remain negligible when compared with global stock markets, but they are gaining traction. That trend could introduce new participants and infrastructure and reshape market structure.
ESMA also identified prediction markets as an emerging risk area. It said concerns around insider trading and market manipulation are rising, and added that crypto use in prediction markets can make insider trading, wash trading and coordinated market manipulation harder to detect.
US prediction markets are facing a widening legal dispute
ESMA’s warning came as prediction markets in the United States face a growing regulatory battle over whether event contracts should fall under federal derivatives law or state gambling rules.
The Commodity Futures Trading Commission (CFTC) has issued guidance for prediction markets throughout 2026 while defending what it describes as its exclusive jurisdiction over federally regulated event contracts.
The agency has also sued several states, including Kentucky, Minnesota, New Mexico, New York, Illinois and Connecticut, after authorities sought to apply state gambling laws to prediction market operators.
The dispute could ultimately reach the US Supreme Court. On Sept. 2, New Jersey officials petitioned the court to decide whether states can enforce sports gambling laws against prediction markets registered with the CFTC, citing litigation over the issue across at least 20 states.
It remains unclear whether the Supreme Court will take up the case, but a future ruling could determine whether prediction markets fall under state or federal jurisdiction.