ESMA Flags Risks in Crypto, Tokenization, and Prediction Markets

The European Securities and Markets Authority said digital assets and prediction markets were covered in three chapters of its latest Trends, Risks and Vulnerabilities Report for the first half of 2026. According to ChainCatcher, the report warned that closer links between crypto assets and the traditional financial sector could create risks. The report also said tokenized versions of the same stock could fragment liquidity. It noted that prediction markets have not developed significantly in Europe because major platforms do not yet hold EU licenses, which are required in most cases. ESMA outlined potential benefits of tokenization, including greater efficiency, broader investor access, programmability, and atomic settlement. It also questioned how much of those benefits are actually realized in wrapped structures. The report said ownership of the underlying stock remains off-chain, meaning there is no single on-chain source of truth, and self-custody can only be achieved indirectly through these structures. It added that tokenization introduces extra intermediary layers, increasing complexity and risk. ESMA said settlement advantages are also difficult to achieve. Even when token transfers occur on-chain, the cash leg of a trade is often settled separately through bank payments or other channels, meaning promised atomic settlement has not been achieved in some transactions.