ESMA warns prediction markets raise insider risks

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. Summary ESMA warned growing crypto links could transmit shocks into traditional finance as market connections increase. Tokenized equity value rose from €0.3 billion to €1.9 billion within eighteen months, ESMA reported. Wrapped stock tokens may fragment liquidity because blockchain transfers often do not convey legal ownership. Prediction volumes reached $12 billion on Polymarket and $8.8 billion on Kalshi during Q4 2025. ESMA said pseudonymous trading can hinder detection of insider dealing, wash trades, and coordinated manipulation. 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. C...