Europe’s securities regulator has warned that growing links between crypto and traditional finance could increase the risk of shocks spreading across the broader financial system.

In its latest risk monitoring report published Thursday, the European Securities and Markets Authority (ESMA) called for closer monitoring of the “growing linkage between increasingly vulnerable crypto-asset markets and the broader financial system.”

ESMA pointed to growing adoption of tokenized equities and recent decentralized finance (DeFi) exploits as areas that could deepen links between crypto and traditional markets and increase the potential for financial spillovers.

ESMA risk indicators for EU financial markets. Source: ESMA

The regulator said…