The European Securities and Markets Authority warns: Crypto market linkage may exacerbate risks to t

European securities regulators warn that the boundaries between crypto markets and traditional finance are becoming increasingly blurred, and systemic risk transmission is intensifying

The European Securities and Markets Authority (ESMA) released a latest risk assessment report stating that the boundaries between the crypto asset market and traditional financial markets are becoming increasingly blurred. This close connection could cause systemic shocks to spread on a wider scale. The report emphasizes that given the growing links between the highly fragile crypto asset market and the broader financial system, regulators need to maintain close monitoring.

Core Points

• Risk amplification effect: ESMA warns that increased connectivity between crypto markets and traditional finance may amplify the impact of financial shocks.
• The rise of tokenized stocks: Although tokenized stocks still account for a small proportion globally, ESMA points out that they have strong momentum and may change market structure in the long term.
• Spillover effects of DeFi vulnerability: Recent attacks on decentralized finance (DeFi) are seen as a factor deepening the connection between the crypto market and the broader market.
• Regulatory challenges in the forecast market: ESMA expresses great concern about the forecast market and is concerned that the intervention of crypto technology may cover up violations such as insider trading and increase supervision difficulty.
• U.S. Jurisdiction Disputes: In the United States, jurisdiction disputes over incident contracts are ongoing and may ultimately be decided by the Supreme Court.

ESMA's systemic risk warning on the link between crypto and traditional finance

ESMA's latest assessment focuses on the growing correlation between "crypto asset markets"(described as increasingly fragile) and the broader financial system. Regulators believe that as the adoption of crypto-related tools increases, new paths for pressure to be transmitted between different sectors emerge, potentially affecting market participants beyond the crypto ecosystem.

The report highlights two trends: the popularity of tokenized stocks and the persistence of decentralized finance (DeFi) vulnerabilities. ESMA does not imply that tokenization has completely reshaped global stock markets, but emphasizes the importance of momentum because infrastructure and participant behavior often evolve rapidly once adoption begins to be established.

Tokenized stocks: Although small in size, the impact is gradually evident

ESMA pointed out that compared with global stock markets, the size of tokenized stocks is still negligible. However, the field is gaining increasing attention and has the potential to attract new players and build additional market infrastructure. This combination of "more entities connected to more tracks" adds complexity to the market structure and raises the risk of problems in other areas spreading to equity-linked products.

For investors and market operators, the lesson in reality is that "today is small" does not mean that "tomorrow doesn't matter." ESMA's framework suggests that regulators are not only looking at early stage fraud or behavioral issues, but also focusing on the speed at which market risk may change as participation expands.

DeFi vulnerability: Another spillover channel

In addition to tokenization, ESMA also views decentralized finance (DeFi) vulnerabilities as another factor strengthening the connection between the crypto market and traditional systems. Although DeFi operates mainly on independent chains, losses caused by hacks and vulnerabilities can still resonate through liquidity conditions, counterparty risk and sentiment-especially as certain financial services and investors increasingly interact with crypto venues and products.

ESMA's risk monitoring approach suggests that regulators view these events as part of a broader connected story beyond isolated incidents: shocks that started in the crypto market may gain greater influence if they affect liquidity, exposure, or cross-market positions.

Forecasting markets: stricter supervision and more difficult to detect violations

ESMA also labels forecasting markets as an emerging risk area. Regulators have warned that attention is growing to insider trading and market manipulation. In particular, ESMA stated that the use of cryptocurrencies in predictive markets makes it more difficult to detect insider trading, laundering transactions and coordinated manipulation.

This warning is crucial because the predictive market is designed to reflect and trade information about future events. If transaction violations are more difficult to identify, regulators may face more severe enforcement challenges-especially if on-chain activities and cross-border transactions blur investigation boundaries.

The U.S. jurisdiction battle over incident contracts continues to simmer

ESMA issued a warning as it predicts that markets will continue to face regulatory conflicts in the United States. At the heart of the controversy is whether "event contracts" should be considered federal derivatives or fall under state gambling laws.

In the United States, the Commodity Futures Trading Commission (CFTC) issued guidelines for forecasting markets in 2026 while insisting on its exclusive jurisdiction over federally regulated event contracts. In addition, the agency has taken legal action after authorities in multiple states tried to apply state gambling laws to predictive market operators.

Previous reports indicate that the lawsuit involves Kentucky, Minnesota, New Mexico, New York, Illinois and Connecticut. The overall dispute could eventually go to the U.S. Supreme Court.

According to broader U.S. media reports, New Jersey officials petitioned the Supreme Court on September 2 to determine whether states can enforce sports gambling laws on predictive markets registered with the CFTC. The petition mentions lawsuits that cover at least 20 states. It is unclear whether the Supreme Court will accept the case, but any ruling could reshape the regulatory system that governs incident contracts nationwide.

Follow-up Focus on EU and Cross-Border Markets

The ESMA report shows that regulators are preparing for a world where tokenization tools, DeFi liquidity flows and crypto-backed market platforms may meet more frequently. Investors and builders should pay close attention to the development of enforcement and surveillance capabilities-especially in predicting markets-and jurisdictional developments in the United States may further determine how participants design products that meet cross-border compliance requirements.

The key uncertainties now are how quickly early crypto adoption will transform into mainstream market infrastructure, and how regulators will manage the systemic risk spillovers that arise in the process.