EU Regulator Warns Crypto Links to Traditional Finance Could Spread Market Risks

The European Securities and Markets Authority has warned that deepening connections between crypto markets and traditional finance could increase the risk of financial shocks spreading across the wider system. In its latest risk report, the regulator called for closer monitoring of ties between vulnerable crypto markets and mainstream finance.

ESMA pointed to rising adoption of tokenized equities and recent decentralized finance exploits as key factors that could strengthen these links. While tokenized equities remain small compared to global stock markets, the regulator noted they are gaining momentum and could bring new participants and infrastructure into traditional market systems.

Prediction Markets Raise Manipulation Concerns

The regulator also identified prediction markets as an emerging risk area, citing difficulties in detecting insider trading, wash trading, and coordinated manipulation when crypto is involved.

US Faces Separate Legal Battle Over Prediction Markets

Meanwhile, prediction markets are caught in a jurisdictional dispute in the United States. The Commodity Futures Trading Commission has issued guidance defending its authority over event contracts, while suing several states, including Kentucky, Minnesota, New Mexico, New York, Illinois, and Connecticut, after those states attempted to apply gambling laws to prediction market platforms.

New Jersey officials recently asked the Supreme Court to determine whether states can enforce gambling laws against CFTC-registered prediction markets, with similar disputes ongoing in roughly 20 states. Whether the case will be heard remains uncertain.