ESMA Warns Crypto Market Growth Could Pose Broader Financial Stability Risks

The European Union’s premier market regulator has expressed concerns about the expansion of the cryptocurrency market.

The European Securities and Markets Authority (ESMA) warns that deepening connections between crypto assets like Bitcoin and traditional financial systems create potential threats to overall financial stability.

Despite its relatively modest size, the crypto sector advances rapidly, raising alarm among financial authorities. Based on this trajectory, ESMA’s assessment identifies escalating systemic risk that could lead to substantial market disruptions if left unchecked.

ESMA Urges Closer Monitoring of Crypto’s Growing Ties with Traditional Finance

ESMA Executive Director Natasha Cazenave addressed the European Parliament on April 8 about crypto market risks.

Cazenave warned that crypto could trigger broader financial disruptions even while accounting for only 1% of EU investment funds. Most EU banks remain uninvolved in crypto activities, and 95% of these institutions are avoiding the sector entirely.

However, the rapidly growing connections between crypto and traditional finance, especially in the U.S., demand increased vigilance and caution due to the crypto sector’s inherent volatility.

The collapse of stablecoins or other crypto assets pegged to traditional currencies could create ripple effects on financial assets and spread across markets, Cazenave explained.

The EU has already introduced the Markets in Crypto-Assets (MiCA) regulation to safeguard against crypto risks.

Cazenave believes this framework provides the necessary safeguards against crypto risks but may not be sufficient for future challenges. Rising security concerns were also mentioned during the address.

The ESMA Executive Director mentioned increasing risks from hacks, scams, and the collapse of crypto companies, citing the fallout from FTX’s 2022 collapse and its impact on confidence in the sector.

Concerns Grow Over Crypto Policies and Trade War-Induced Global Recession

This warning comes amid recent global market turbulence, including the fallout from U.S. President Donald Trump’s April 5 announcement of new tariffs and regulatory moves to ease restrictions between banks and the crypto sector.

Additionally, Reuters reported that the U.S. Justice Department is dismantling its National Cryptocurrency Enforcement Team. The department now focuses primarily on crypto use in terrorism and drug cartel operations instead of broader crypto oversight.

This policy shift has raised concerns, especially as the Trump family maintains significant ties to the DeFi protocol, the World Liberty Financial, while the administration reverses previous crypto policies.

Democrats and financial policy experts actively oppose the Republican administration’s pro-crypto agenda.

One such example is Democrat Gerald E. Connolly’s letter to the U.S. Treasury, urging it to halt efforts to establish a strategic crypto reserve, citing potential conflicts of interest.

As China announced retaliatory tariffs on the U.S., declaring in a white paper release that it has no intention of bowing to U.S. demands, a trade war between the two nations has begun.

With the U.S. now imposing a total 104% tariff on Chinese imports, fears of a global recession are growing as the world’s two largest economies clash.

Fitch Ratings’ Olu Sonola, head of U.S. Economic Research, explained that the situation represents a significant shift for the U.S. economy and the global economy.