European financial regulators are issuing warnings about the escalating valuations of crypto-assets, which are largely fueled by expectations of deregulation in the United States under the current administration, potentially threatening global financial stability.
The Joint Committee of the European Supervisory Authorities (ESAs) raised concerns in its Spring 2025 risk assessment, pointing out the destabilizing effects of geopolitical fragmentation, uncertainty in US policies, and volatility within the digital asset markets.
The committee comprises the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA).
The report indicated that “recent all-time high valuations and volatility in crypto-assets, along with increasing connections to traditional financial markets,” represent significant challenges to financial stability.
While it refrained from specifically naming the US president, the ESAs clearly linked the rise in crypto values to political anticipations.
The report stated:
“Crypto: Volatile valuations of crypto-assets, driven by expectations surrounding the US deregulatory agenda; growing interconnections to conventional financial markets.”
Increased exposure to volatility
The ESAs pointed out that 77% of equity fund flows in the EU (excluding ETFs) in the last five years have gone towards US equities, demonstrating the region’s significant exposure to American markets.
Insurance firms and pension funds also have considerable investments outside the European Economic Area, with 6% to 17% of their assets concentrated in the US, varying by sector. This swelling cross-border exposure occurs against a backdrop of inflated market valuations and increased leverage in alternative investment vehicles.
The report cautioned that, combined with speculation in the crypto market, these conditions could lead to “shock risks for funds experiencing liquidity mismatches.” Regulators highlighted the possibility of disproportionate market reactions given the broader economic context.
The document emphasized:
“The risk of extreme reactions to unexpected events in light of recent all-time high US stock valuations and historically low EU corporate bond spreads.”
The report also noted that volatility prompted by policy shifts could have significant ripple effects across various asset classes.
Fragmented oversight and systemic vulnerabilities
The Joint Committee cautioned that increasing divergence among jurisdictions, especially if major economies opt for deregulation while others impose stricter rules, could further undermine financial coordination.
The report also highlighted the combined threats of artificial intelligence adoption and cyber risks, which are on the rise in the financial realm. The ESAs noted that changing geopolitical relations “could elevate cyber risks within the EU.”
The ESAs urged financial institutions to factor in risks related to cryptocurrencies in their scenario analyses, calling for vigilance regarding policy-induced market fluctuations. The report advised institutions to “prepare for potential risks” and stressed the importance of robust risk frameworks, recovery plans, and proper provisioning.
While the EU has progressed with its own regulatory framework for crypto-assets through the Markets in Crypto-Assets (MiCA) regulation, officials are increasingly anxious that a deregulatory trend in the US could undercut these initiatives and create arbitrage opportunities that destabilize markets.
The ESAs concluded that remaining alert is essential as the crypto sector expands in size and influence, cautioning that the market may experience increased volatility if geopolitical uncertainties remain prevalent.
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