As the cryptocurrency market expands and its connections to traditional financial markets deepen, the European Union’s securities watchdog cautioned on Tuesday that issues in the sector could eventually threaten long-term financial stability.
The European Securities and Markets Authority (ESMA) issued the warning as U.S. economic policies are causing global markets to tremble and U.S. authorities are trying to lift some of the restrictions that separate the traditional banking and cryptocurrency industries.
In a speech to the European Parliament that was uploaded on the watchdog’s website, ESMA executive director Natasha Cazenave stated that the wider political and geopolitical developments are causing significant strain on EU financial markets at the moment.
Since U.S. President Donald Trump announced a flurry of tariffs last week, stock markets have plummeted, and cryptocurrency prices have also fallen sharply. Nonetheless, Tuesday saw a partial recovery of those losses in asset values across markets.
Although the markets for crypto-assets are still relatively small, Cazenave noted that in the current market environment, even small market volatility can lead to or trigger larger stability issues in our financial system. ESMA, which has issued numerous warnings about the risks associated with crypto, stated that the sector requires continued close monitoring, but cautioned that the risks to financial stability posed by crypto are not yet significant. Less than 1% of the EU fund universe consists of crypto-focused funds, and 95% of EU banks do not participate in crypto activities.
The warning from ESMA comes as Trump, whose family is developing a cryptocurrency company, has advocated for a relaxation of crypto laws.
U.S. authorities have facilitated banks’ participation in cryptocurrency-related operations. The U.S. Justice Department is disbanding its National Cryptocurrency Enforcement Team, according to the report.
A run on a stablecoin, a kind of cryptocurrency that is usually based on the dollar, could affect the value of the financial assets that support it, according to ESMA, and could have wider market repercussions.
