ESMA Sounds Alarm on Crypto-Traditional Finance Links
Regulatory bodies are sounding alarms about growing links between cryptocurrency and traditional finance. The European Securities and Markets Authority (ESMA) has issued a warning that increasing connections between crypto-asset markets and the broader financial system could lead to increased risk of shocks spreading across the market.
The ESMA's latest risk monitoring report highlights tokenized equities as an area where these links are deepening. Tokenized equities are digital representations of traditional stocks, which have seen a surge in adoption this year. According to ESMA, while they remain a small part of global stock markets, they could introduce new participants and infrastructure that reshapes market structure.
Another emerging risk flagged by the regulator is prediction markets. Prediction markets rely on cryptocurrency to facilitate trades, but ESMA warns that this makes it harder to detect insider trading and market manipulation. The use of cryptocurrency in these markets can also blur the lines between traditional finance and crypto-asset markets.