The European Securities and Markets Authority has issued a fresh caution over the expanding connections between crypto-asset markets and traditional finance, saying these ties could allow shocks to spread more easily across the broader system. In its second risk monitoring report of 2026, released on September 10, the authority identified tokenized equities, decentralized finance vulnerabilities and prediction markets as areas that require ongoing surveillance.

Crypto prices had erased nearly $2.2 trillion in market value since their October peak, according to the report, even as links with established financial firms continued to strengthen. ESMA maintained its highest classification for market, contagion and operational risks. Credit risk stayed high while environmental risk was rated medium. The ratings were linked to geopolitical tensions, persistent inflation, higher borrowing costs and elevated equity valuations.

Ross added that an abrupt correction could follow if sentiment shifted or economic risks materialized.

Tokenized Equities Expand Rapidly from a Low Base

Public data examined by ESMA showed the value of outstanding tokenized equities reaching approximately $2.1 billion by the end of June. The figure stood near $330 million at the end of 2024, marking a more than sixfold rise over eighteen months. Most of the activity centered on large U.S.-listed technology companies, drawn by their market value, liquidity and investor familiarity. The overall size remained negligible relative to global stock markets.

Wrapped products dominated the segment. These structures typically give the token holder a claim on or economic exposure to shares held by another party. A blockchain transfer usually does not alter the shareholder recorded in the company’s official register. ESMA noted that such arrangements can create dependencies on tokenization platforms and custodians. Multiple tokens tracking the same share may trade across platforms without full interchangeability, potentially fragmenting liquidity and weakening price discovery under stress.

Some transfers occur on-chain while the related cash payment moves through conventional systems. This hybrid approach requires reconciliation between separate infrastructures and limits any reduction in settlement risk. Programmable features could automate dividends, stock splits and regulatory checks, yet they also open pathways for tokenized equities to serve as collateral or enter other on-chain transactions within decentralized finance protocols.

DeFi Exploits and Smart-Contract Concerns

Code failures introduce distinct risks. A smart-contract error can produce an incorrect transfer or misallocate ownership rights. Automated execution combined with blockchain immutability can make such outcomes difficult to reverse once recorded. Recent decentralized finance exploits have reinforced the regulator’s attention to interconnected markets. ESMA did not assert that crypto currently poses a systemic threat to the European Union financial system, but it called for continued monitoring as tokenized products and decentralized infrastructure develop stronger institutional links.

Under the EU’s DLT Pilot Regime, approved market operators can test blockchain-based trading and settlement within defined limits. The authority also pointed to common technical standards and European Central Bank projects addressing legal and settlement barriers. Many potential benefits of tokenization, the report stated, depend on design choices, scale and interoperability. Atomic settlement can eliminate the gap between delivery and payment, yet individual transaction settlement may demand greater immediate liquidity than systems that net multiple obligations.

Prediction Markets Draw Scrutiny Over Trading Conduct

ESMA devoted a dedicated section to prediction markets, where participants trade contracts linked to future events. Data from leading platforms showed quarterly volume reaching roughly $12 billion on one major venue and $8.8 billion on another during the fourth quarter of 2025. Sports accounted for a large share of activity on the regulated platform, while politics, sports and crypto markets featured prominently on the on-chain venue.

Prediction markets have gained less traction in the European Union than in the United States. Depending on their structure, event contracts may fall under MiFID II, MiCA or national gambling rules. Contracts treated as derivatives can face national restrictions, including bans on sales to retail investors. Platforms restrict access in some EU countries, yet ESMA questioned the completeness of those lists and described the effectiveness of geographic controls as uncertain, noting that virtual private networks can bypass them.

Pseudonymous accounts can hinder the detection of insider dealing, wash trades and coordinated manipulation. The report cited instances in which newly created wallets generated $1.2 million shortly before certain geopolitical events became public. ESMA did not independently identify the traders or confirm legal violations. Additional concerns involve the information used to settle contracts. Oracle failures, disputed outcomes and unclear contract wording can delay payments or produce contested resolutions.

The authority stated that continued monitoring remains warranted as institutional and retail participation expands. One EU member state began exploring a dedicated prediction-market framework in March 2026, though no final regime has been enacted.