The European Securities and Markets Authority (ESMA) stated in its latest risk monitoring report that as the crypto market becomes more interconnected with traditional finance, market volatility may more easily spread to the broader financial system. The report specifically highlighted tokenized stocks, DeFi, and prediction markets, noting that expansion in these areas is introducing new trading, settlement, and compliance risks.
ESMA stated that since last October’s peak, cryptocurrency asset prices have lost nearly €2 trillion in market capitalization, yet connections between financial institutions and crypto infrastructure continue to grow. The agency continues to maintain market risk, contagion risk, and operational risk at the highest level, linking this assessment to geopolitical tensions, persistent inflation, rising financing costs, and elevated stock valuations.
Tokenized stocks rise to €1.9 billion
ESMA discloses that, as of the end of June, the outstanding volume of tokenized stocks was approximately €1.9 billion. In comparison, the market was around €300 million at the end of 2024, representing a roughly 6.5-fold expansion over 18 months.
Looking at the distribution of trades, the related products remain primarily concentrated in large U.S. technology stocks. ESMA believes that these stocks, due to their large market capitalization, strong liquidity, and greater familiarity among investors, are more easily packaged into tokenized products. However, this scale remains small compared to the global stock market.
The report also notes that some tokenized stocks use a hybrid structure involving on-chain asset transfers and off-chain cash payments. This means that, after the transaction, reconciliation is still required between two separate infrastructures, and settlement risk is not fully eliminated. ESMA also cautions that certain on-chain transfers do not automatically correspond to legal ownership changes, which may further fragment liquidity.
DeFi integration amplifies technical risks
ESMA states that programmable securities can automatically handle dividends, stock splits, and certain compliance checks, and may also integrate further with DeFi protocols to serve as collateral or participate in other on-chain transactions. However, such designs also combine the risks of traditional securities with those of smart contracts.
The institution stated that coding errors in smart contracts can lead to incorrect transfers or flawed ownership allocation. Since on-chain transactions are executed automatically and are difficult to reverse, issues are often harder to correct after they occur. Recent DeFi attack incidents have also heightened regulators' awareness of cross-market联动 risks.
ESMA also noted that the EU is testing blockchain-based trading and settlement structures through its DLT pilot regime, citing relevant European Central Bank projects as efforts to address legal and settlement barriers. However, the report concludes that whether tokenization can genuinely enhance efficiency depends on product design, market size, and the degree of interoperability between different systems.
Predictive market trading activities are under review
In the prediction markets section, ESMA analyzed Polymarket and Kalshi separately. Data shows that in the fourth quarter of 2025, Polymarket’s quarterly trading volume was approximately $12 billion, while Kalshi’s was approximately $8.8 billion.
Among these, Kalshi has identified that approximately 73% of its trades are related to sports; Polymarket’s trading volume is composed of political, sports, and crypto markets, accounting for 29%, 19%, and 15% respectively. ESMA notes that such markets remain less prevalent in the EU than in the U.S., and their legal classification is inconsistent, potentially falling under MiFID II, MiCA, or individual member states’ gambling regulations.
The report states that anonymous or pseudonymous accounts make it more difficult to identify insider trading, wash trading, and coordinated manipulation. ESMA cited an example in which a newly created wallet generated approximately $1.2 million in profits shortly before the public announcement of U.S. and Israeli strikes against Iran. However, the report did not confirm the identity of the traders involved or determine whether any specific laws were violated.
ESMA also noted that there are risks associated with the sources of settlement information for prediction markets. In April, the French meteorological agency Météo-France filed a report alleging that sensors related to Polymarket’s weather markets were suspected of being tampered with. The report stated that failures of oracles, ambiguous contract wording, or disputes over outcome determination could lead to payment delays or settlement disputes.
Overall, ESMA has not determined that the crypto market currently poses a systemic threat to the EU financial system, but it believes that tokenized products, DeFi, and prediction markets require ongoing monitoring as institutional participation and retail trading continue to grow.