According to Foresight News, the European Securities and Markets Authority (ESMA) has released a report outlining the multiple risks that decentralized finance (DeFi) poses to investors and financial stability. The report highlights the main concerns of regulators regarding DeFi innovations and categorizes smart contracts into five types: financial, operational, token, wallet, and infrastructure. This categorization aims to help regulators understand the 'enormous technical complexity' of these systems. The report states that 'although overall exposure to DeFi remains small for investors, investor protection faces serious risks due to the highly speculative nature of many DeFi arrangements, severe operational and security vulnerabilities, and the lack of clear responsible parties.'

The European Union's independent agency warns that DeFi operates without trusted intermediaries and raises concerns about the prevalent 'code is law' principle. The ESMA claims that this principle has permeated existing DeFi governance, and adherence to it can lead to a tendency to accept smart contract outcomes 'without considering any moral or legal considerations.'