ESMA Sounds Alarm on Crypto-Traditional Finance Convergence

The European Securities and Markets Authority (ESMA) has issued a warning about the growing links between the crypto market and traditional finance. According to ESMA, nearly €2 trillion of market value has been stripped from crypto losses since their October highs. This convergence could lead to more market contagion.

ESMA's second risk monitoring report for 2026 highlighted rising contagion risks in the crypto sector. The report noted that tokenization and decentralized finance (DeFi) are growing, increasing on-chain risks and pushing crypto closer to traditional finance.

The ESMA report did not predict a market collapse but warned of spillover effects due to volatile crypto trading markets and tighter connections to traditional finance. DeFi exploits have also added another layer of risk, as the failure or breach of one protocol can cause losses or failure in other parts of the network.