ESMA Warns of Crypto Risks to Financial Stability Amid Growing Ties to Traditional Markets

As the sector continues to expand and form closer connections with traditional financial markets, the watchdog urged increased vigilance.

Crypto’s Growing Impact on Financial Systems

Speaking before the European Parliament, ESMA Executive Director Natasha Cazenave acknowledged that while crypto markets remain relatively small, they could trigger broader financial instability if the sector experiences turbulence. Cazenave noted that even disruptions in smaller markets could spark wider systemic issues, especially in today’s volatile global environment. This concern comes as U.S. economic policies, including tariffs imposed by President Donald Trump, contribute to significant global market fluctuations, with crypto prices among the hardest hit.

Ongoing Monitoring and Limited Impact on EU Financial Stability

While the crypto sector’s influence is growing, Cazenave reassured that the risks to the EU’s financial stability remain manageable for now. Crypto-focused funds currently account for less than 1% of the EU fund market, and the majority of EU banks (95%) are not yet involved in crypto-related activities. However, the ESMA emphasized that the sector should continue to be closely monitored.

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The authority also expressed concerns over the potential risks posed by stablecoins, particularly if a run on these assets were to occur. Such an event could impact the assets used to back stablecoins and lead to broader market disruptions.

U.S. Policy Shifts and Crypto Regulation

The warning comes as the U.S. government takes steps to ease regulations on crypto-related activities. U.S. regulators, under President Trump’s administration, have relaxed rules to encourage banks’ involvement in the crypto market, with the Justice Department recently dissolving its National Cryptocurrency Enforcement Team.

ESMA’s caution reflects growing concerns about the intertwining of crypto and traditional financial systems, underscoring the need for continued vigilance as the sector evolves.

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