On October 11, the European Securities and Markets Authority (ESMA) published a report on the dangers of decentralised finance (DeFi) for the EU market. The 22-page research highlights the potential advantages of DeFi, including greater financial inclusion, the development of novel financial products, and higher speed, security, and affordability of financial transactions.
The paper also highlights the considerable risks connected to DeFi, though. Because many crypto-assets are extremely speculative and volatile, ESMA names liquidity risk as its top concern. The regulator finds that Bitcoin and Ether have 30-day volatility that is, on average, 3.6 and 4.7 times higher than the Euro Stoxx 50.
The paper also points out that despite using atomicity and smart contracts, DeFi has not been able to completely eliminate counterparty risk because smart contracts are not impervious to mistakes or faults.
Due to the absence of know-your-customer (KYC) measures, DeFi is particularly vulnerable to fraud and illegal activity. The analysis emphasises additional concerns for DeFi consumers as being the lack of a recognised responsible party and a complaint mechanism. Nevertheless, the analysis comes to the conclusion that, given their tiny scale and scant connectivity to conventional financial markets, DeFi and crypto-assets do not currently represent significant dangers to financial stability.
The ESMA has been keeping a close eye on the cryptocurrency market, and on October 5 it published its second consultative paper on Markets in Crypto-Assets (MiCA) mandates. The regulator proposed in a 307-page paper that crypto asset providers be permitted to keep transaction data in whichever format they deem most appropriate as long as they can convert it into a certain format upon request from authorities.