Umair
European financial regulators are warning that rising crypto-asset valuations, driven by expectations of US deregulation under President Donald Trump, could pose a growing threat to global financial stability.
The Joint Committee of the European Supervisory Authorities (ESAs) raised the alarm in its Spring 2025 risk update, highlighting the destabilizing impact of geopolitical fragmentation, US policy uncertainty, and digital asset market volatility.
The committee includes the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA).
The report noted that “recent record high crypto valuations and volatility in the context of increasing interconnections to traditional financial markets” present a growing challenge to financial stability.
While it did not mention President Donald Trump by name, the ESAs explicitly tied the surge in crypto prices to political expectations.
According to the report:
“Crypto: Volatile crypto-asset valuations, driven by expectations of US deregulatory policy agenda; increasing interconnections to traditional financial markets.”
Deepening exposure to volatility
According to the ESAs, 77% of EU equity fund flows (excluding ETFs) over the past five years were directed to US equity holdings, illustrating the bloc’s heavy exposure to American markets.
Insurers and pension funds also maintain significant allocations outside the European Economic Area, with 6% to 17% of their assets concentrated in the US, depending on the sector. This rising cross-border exposure comes amid elevated market valuations and growing leverage in alternative investment funds.
The report warned that these conditions, paired with crypto speculation, could create “risks of shocks to funds with a liquidity mismatch.” The regulators emphasized the risk of disproportionate market reactions given the macro backdrop.
The report stated:
“Risk of disproportionate reactions to surprises given recent record high US stock valuations and historically low EU corporate bond spreads.”
It further suggested that volatility triggered by policy surprises could have outsized ripple effects across asset classes.
Fragmented oversight, systemic vulnerabilities
The Joint Committee warned that growing divergence between jurisdictions, particularly if major economies ease regulations while others tighten, could further erode financial coordination.
The report also spotlighted the dual threat of AI adoption and cyber risk, which are both escalating in the financial sector. The ESAs warned that the realignment of geopolitical relations “could further heighten cyber risks in the EU.”
The ESAs called on financial institutions to incorporate crypto-related risks into their scenario analysis and to stay alert to policy-driven market shifts. The report advised institutions to “be ready for risks” and emphasized the need for adequate provisioning, recovery plans, and strengthened risk frameworks.
While the EU has moved forward with its own regulatory regime for crypto through the Markets in Crypto-Assets (MiCA) regulation, officials are increasingly concerned that a deregulatory push in the US could undermine those efforts and create arbitrage opportunities that destabilize markets.
The ESAs concluded that vigilance is critical as the crypto sector grows in size and influence and warned that the market could potentially face heightened volatility if the geopolitical uncertainty persists.
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