The European Securities and Markets Authority has warned that closer links between crypto and traditional finance could transmit market shocks as tokenized equities reached €1.9 billion.
ESMA’s second risk monitoring report of 2026, published Sept. 10, identified tokenized stocks, decentralized finance exploits and prediction markets as areas requiring continued monitoring. The regulator said crypto prices had erased nearly €2 trillion in market value since their October peak while connections with established financial firms continued to grow.
Europe’s securities regulator kept market, contagion and operational risks at its highest classification. Credit risk remained high, while environmental risk received a medium score. ESMA tied the ratings to geopolitical tensions, persistent inflation, rising borrowing costs and elevated equity valuations.
“Investor optimism continues to support elevated valuations despite rising geopolitical tensions and a weakening economic outlook,” ESMA Chair Verena Ross said.
She warned that an abrupt correction could follow if sentiment changed or economic risks materialized.
Tokenized equities have grown from a small base
Public data reviewed by ESMA placed the value of outstanding tokenized equities at approximately €1.9 billion at the end of June. The market stood near €300 million at the end of 2024, producing a 6.5-fold increase over eighteen months.
Most activity remained concentrated in large U.S.-listed technology companies. ESMA named their market value, liquidity and familiarity among investors as factors supporting their use in tokenization products. The total remained negligible beside global stock markets.
Wrapped products accounted for most tokenized equity activity. Under these structures, a token gives its holder a claim on or economic exposure to shares held by another party. The blockchain transfer does not normally change the shareholder recorded in the company’s official register.
According to the report, such arrangements can create dependencies on tokenization platforms and custodians. Multiple tokens tracking the same share may trade across platforms without being fully interchangeable, which ESMA said could divide liquidity and weaken price discovery during stressed conditions.
Some token transfers occur on-chain while the corresponding cash payment moves through conventional systems. ESMA said this hybrid structure requires reconciliation between separate infrastructures and limits the reduction in settlement risk.
U.S. regulators are considering another model. As crypto.news reported, the SEC proposed recognizing blockchain databases as official securities ownership records, subject to transfer-agent controls and other securities rules. Public comments on that proposal remain open for 60 days.
Institutional investment is reaching the same sector. In related coverage, Nasdaq agreed to invest $100 million in Kraken parent Payward as the companies develop tokenized equity and blockchain settlement infrastructure. Their Nasdaq Equity Tokens project is scheduled for a second-quarter 2027 launch.
DeFi connections introduce smart contract risks
Programmable securities could automate dividends, stock splits and regulatory checks, ESMA found. The same functions could connect tokenized equities with DeFi protocols by permitting stock-linked assets to serve as collateral or enter other on-chain transactions.
Code failures create a separate set of risks. A smart contract error can cause an incorrect transfer or misallocate ownership rights. Automated execution and blockchain immutability can make the result difficult to reverse after a transaction enters the ledger.
Recent DeFi exploits have renewed the regulator’s concerns about interconnected markets. ESMA did not claim that crypto currently poses a systemic threat to the EU financial system. Its report called for monitoring as tokenized products and decentralized infrastructure develop stronger links with financial institutions.
Under the EU’s DLT Pilot Regime, approved market operators can test blockchain-based trading and settlement structures within specified limits. ESMA cited the regime, common technical standards and the European Central Bank’s Pontes and Appia projects among efforts addressing legal and settlement barriers.
The regulator said many proposed benefits of tokenization depend on design, scale and interoperability. Atomic settlement can remove the delay between delivery and payment, but settling each transaction individually may require more immediate liquidity than systems that net many obligations together.
Prediction markets draw scrutiny over trading conduct
ESMA devoted a separate section to prediction markets, where participants trade contracts based on future events. Polymarket uses on-chain trading and settlement with centralized market administration, while Kalshi operates as a centralized CFTC-regulated designated contract market.
Data gathered from both platforms showed quarterly volume reaching roughly $12 billion on Polymarket and $8.8 billion on Kalshi during the fourth quarter of 2025. Sports represented 73% of identified Kalshi activity. Polymarket’s volume consisted of 29% politics, 19% sports and 15% crypto markets.
The regulator said prediction markets had gained less traction in the EU than in the U.S. Depending on their structure, event contracts can fall under MiFID II, MiCA or national gambling law. Contracts classified as derivatives may face national restrictions covering binary options, including bans on sales to retail investors.
Polymarket and Kalshi restrict users in some EU countries, though ESMA questioned why their lists do not cover every member state. The regulator said virtual private networks can bypass geographic blocks, while describing the effectiveness of platform controls as “uncertain.”
Pseudonymous accounts can make it harder to identify insider trading, wash transactions or coordinated manipulation, the report said. ESMA cited reports that newly created wallets earned $1.2 million shortly before the February U.S.-Israeli strikes on Iran became public. The regulator did not independently identify the traders or establish that the transactions violated a specific law.
Concerns extend to the information used to settle contracts. French weather service Météo-France filed a police complaint in April after suspected interference with sensors connected to Polymarket weather markets, according to the report. Oracle failures, disputed outcomes and unclear contract language can delay payments or produce contested resolutions.
Across the Atlantic, the CFTC continues to assert exclusive authority over federally regulated U.S. prediction markets, while several states argue that sports event contracts fall under their gambling laws. The agency’s March advisory reminded designated contract markets of their duties under the Commodity Exchange Act, including product review and compliance requirements.
ESMA said continued monitoring was warranted as institutional participation and retail activity expanded. Malta became the first EU member state to publicly explore a dedicated prediction-market framework in March 2026, though the government has not enacted a final regime.