On October 11, the European Union’s markets regulator, the European Securities and Markets Authority (ESMA), published an article on Decentralized Finance (DeFi) stating its benefits and hazards for the EU Market.
In a 22-page report, the ESMA acknowledges the promised benefits of DeFi, such as greater financial inclusion, the creation of innovative financial products, and the improvement of the efficiency, security, and costs of financial transactions.
The paper also emphasizes the “significant risks” associated with DeFi. According to ESMA, the first is the liquidity risk associated with numerous crypto assets’ highly speculative and volatile nature.
The regulator contrasts the 30-day volatility of Bitcoin and Ether to that of the Euro Stoxx 50, with Bitcoin and Ether being, on average, 3.6 and 4.7 times more volatile than the Euro Stoxx 50.
The ESMA doesn’t believe that DeFi managed to avoid the counterparty risk, even if, in principle, it should be lower or even non-existent due to smart contracts and atomicity. Nonetheless, smart contracts are not immune to errors and defects.
Lacking know-your-customer (KYC) protocols, DeFi is particularly susceptible to fraud and illegal activity. According to the report, the lack of an identifiable responsible party and the absence of a recourse mechanism pose a significant risk to DeFi users.
The report concludes, however, that DeFi and crypto in general do not pose “meaningful risks” to financial stability at this time. Due to their relatively modest size and limited interconnection with traditional financial markets, this is the case.
On October 5, the European Securities and Markets Authority (ESMA) released its second consultative document on Markets in Crypto-Assets (MiCA) mandates.
In a 307-page document, the regulator proposed permitting crypto asset providers to store transaction data in “the format they consider most appropriate,” so long as they can convert it into a specified format if authorities request.
