ESMA Warns of Crypto Stability Risks as Sector’s Ties to Traditional Finance Deepen

The European Union’s top securities regulator issued a warning on Tuesday that the growing cryptocurrency sector could pose risks to overall financial stability in the future, especially as its connections with traditional financial markets deepen. The European Securities and Markets Authority (ESMA) voiced its concerns as global markets reel from recent shifts in U.S. economic policy, and as U.S. regulators move to reduce barriers between the crypto industry and the traditional banking system.

"EU financial markets are, as we speak, under severe strain coming from the broader political and geopolitical developments," said ESMA Executive Director Natasha Cazenave in a speech delivered to the European Parliament and published on the watchdog’s website.

Stock markets have seen significant losses following a wave of tariffs announced by U.S. President Donald Trump last week, which also triggered a notable decline in cryptocurrency prices. However, by Tuesday, markets had partially rebounded.

"Crypto-assets markets are still comparatively small. However, in the current market environment, turmoil even in small markets can originate or catalyse broader stability issues in our financial system," Cazenave added.

Although ESMA has frequently flagged the risks associated with crypto, Cazenave emphasized that the sector still requires “continued close monitoring,” even though the current threat to financial stability remains limited.

According to ESMA, crypto-focused investment funds represent less than 1% of all funds in the EU, and 95% of EU-based banks are not involved in crypto activities.

The warning comes amid calls from Trump—whose family has ties to a crypto venture—for looser crypto regulations. Meanwhile, U.S. regulators have taken steps to allow greater bank participation in crypto-related operations. Reuters also reported on Tuesday that the U.S. Justice Department is dismantling its National Cryptocurrency Enforcement Team.

ESMA also noted the potential risks of a collapse in stablecoins—cryptocurrencies usually pegged to the dollar—warning that such a scenario could affect the value of the financial assets backing them, with possible ripple effects across broader markets.