PARIS (Reuters) - The European Union's securities watchdog warned on Tuesday that problems in the cryptocurrency industry could pose risks to broader financial stability in future, as the sector grows and as ties between it and traditional financial markets increase.

The appeal for caution from the European Securities and Markets Authority (ESMA) comes as U.S. economic policies roil global markets and U.S. authorities look to remove some of the barriers between crypto and traditional banking sectors.

"EU financial markets are, as we speak, under severe strain coming from the broader political and geopolitical developments," ESMA executive director Natasha Cazenave said in a speech to the European Parliament posted on the watchdog's website.

Stock markets have tumbled since U.S. President Donald Trump unveiled a blizzard of tariffs last week, leading to a sharp drop in crypto prices too. However, asset prices had recovered some of those losses across markets on Tuesday.

"Crypto-assets markets are still comparatively small. However, in the current market environment, turmoil even in small markets can originate or catalyse broader stability issues in our financial system," Cazenave said.

ESMA, which has repeatedly warned about the risks of crypto, said the sector needed continued close monitoring, she added, while cautioning that risks to financial stability from crypto were not yet significant.

Funds focused on crypto make up less than 1% of the EU fund universe, and ESMA noted that 95% of EU banks do not engage in crypto activities.

ESMA's warning comes as Trump - whose family is building a crypto business - has called for an easing of crypto regulations.

U.S. regulators have made it easier for banks to engage in crypto-related activities. Reuters reported on Tuesday that the U.S. Justice Department is disbanding its National Cryptocurrency Enforcement Team.

A run on a stablecoin - a type of cryptocurrency typically pegged to the dollar - could impact the price of the financial assets used to back it, ESMA said, with potentially wider market consequences.