Europe’s securities regulator has warned that the growing integration between digital assets and traditional finance could increase the risk of shocks spreading across markets, even as the crypto sector remains relatively small.
Regulator ESMA Warns Growing Crypto-TradFi Links Could Amplify Market Stress
11 March 2026 - 13:00 CET
By Matt Neill
In its latest Risk Monitor published 11 Mar, the European Securities and Markets Authority (ESMA) said expanding connections between crypto infrastructure and conventional finance, particularly through stablecoins and investment products, warrant closer oversight.
"Growing interlinkages between crypto and traditional markets, including through stablecoins, warrant close attention too, as they increase potential negative spillovers," the regulator said.
The warning comes after a volatile period for digital asset markets that exposed structural weaknesses in the sector.
Flash crash and risk-off sentiment
Crypto markets experienced a sharp sell-off following a record rally in 2025. Total market capitalization peaked at roughly $4.27tn in early October before dropping more than 30% to about $2.93tn by the end of December.
While investor caution had already been building amid concerns about Federal Reserve policy and stretched valuations in technology stocks, ESMA said the immediate trigger was the geopolitical policy shock of US President Donald Trump’s surprise announcement on 10 October of a 100% tariff on Chinese imports.
"The event highlighted structural vulnerabilities in crypto markets, including extreme price volatility, high leverage, and operational weaknesses at crypto exchanges, which continue to weigh on investors’ confidence," ESMA said.
Stablecoins and financial system linkages
At the same time, stablecoins continued to expand rapidly during most of the year, increasing about 23% to roughly €269bn ($312bn at current prices) in market capitalization in the six months through December 2025.
The concentration of the sector also remains a concern. Tether alone accounted for about 59% of the total stablecoin market at the end of 2025, according to ESMA.
The regulator warned that the collapse of a major stablecoin could destabilize the broader crypto ecosystem and potentially transmit stress to traditional financial markets through reserve assets.
European policymakers are increasingly responding by developing sovereign digital infrastructure, including the planned digital euro, which officials view as a strategic alternative to privately issued dollar-pegged stablecoins and global payment networks.
As institutional adoption grows and regulatory frameworks evolve, ESMA said monitoring the connections between crypto markets and the traditional financial system will remain a key priority for European authorities.
