European financial regulators are sounding the alarm about the potential risks posed by the soaring valuations of crypto-assets, fueled by expectations of deregulation in the United States under President Donald Trump. The Joint Committee of the European Supervisory Authorities (ESAs), made up of the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA), highlighted these concerns in its Spring 2025 risk update.
The ESAs emphasized the destabilizing impact of geopolitical fragmentation, US policy uncertainty, and the volatility in the digital asset market. The committee pointed out that the recent surge in crypto prices is closely tied to political expectations, although President Trump was not explicitly mentioned in the report.
The ESAs raised particular concerns about the deepening exposure of EU financial institutions to volatility in the US markets. Over the past five years, a significant portion of EU equity fund flows has been directed towards US equity holdings, indicating the bloc’s heavy reliance on American markets. Additionally, insurers and pension funds have substantial allocations outside the European Economic Area, with a significant portion of their assets concentrated in the US.
The report warned of potential risks stemming from the combination of elevated market valuations, increasing cross-border exposure, and growing leverage in alternative investment funds. The ESAs highlighted the possibility of “shocks to funds with a liquidity mismatch” and emphasized the risk of disproportionate market reactions given the current macroeconomic backdrop.
Furthermore, the ESAs expressed concerns about fragmented oversight and systemic vulnerabilities in the financial sector. The committee warned that growing regulatory divergence among jurisdictions could further erode financial coordination, while the adoption of artificial intelligence and the escalating cyber risks pose additional challenges.
In response to these risks, the ESAs called on financial institutions to incorporate crypto-related risks into their scenario analysis and to remain vigilant to policy-driven market shifts. The report stressed the importance of adequate provisioning, recovery plans, and strengthened risk frameworks to mitigate potential risks.
While the EU has taken steps to implement its own regulatory framework for crypto-assets through the Markets in Crypto-Assets (MiCA) regulation, regulatory divergence between major economies, particularly if the US adopts a deregulatory approach, could undermine these efforts and create arbitrage opportunities that destabilize markets.
In conclusion, the ESAs underscored the importance of vigilance as the crypto sector continues to expand in size and influence. They warned that the market could face increased volatility if geopolitical uncertainty persists and emphasized the need for financial institutions to be prepared for potential risks in the evolving global financial landscape.