According to Cointelegraph, the European Securities and Markets Authority (ESMA) released a report on Decentralized Finance (DeFi) and its risks for the EU Market on October 11. The 22-page report acknowledges the potential benefits of DeFi, such as increased financial inclusion, innovative financial product development, and improved speed, security, and cost of financial transactions.
However, the report also emphasizes the significant risks associated with DeFi. ESMA identifies liquidity risk as the primary concern, due to the highly speculative and volatile nature of many crypto-assets. The regulator compares the 30-day volatility of Bitcoin and Ether to the Euro Stoxx 50, with the former being on average 3.6 and 4.7 times higher than the latter. The report also notes that DeFi has not managed to eliminate counterparty risk, despite the use of smart contracts and atomicity, as smart contracts are not immune to errors or flaws.
DeFi is particularly susceptible to scams and illicit activities due to the lack of know-your-customer (KYC) protocols. The report also highlights the absence of an identifiable responsible party and a recourse mechanism as additional risks for DeFi users. However, the report concludes that DeFi and crypto-assets do not currently pose meaningful risks to financial stability, due to their relatively small size and limited interconnectedness with traditional financial markets.
The ESMA has been closely monitoring the crypto market, releasing its second consultative paper on Markets in Crypto-Assets (MiCA) mandates on October 5. In a 307-page document, the regulator suggested allowing crypto asset providers to store transaction data in the format they consider most appropriate, as long as they can convert it into a specified format upon request from authorities.
