April 19, 2024
European Regulator Emphasizes Both Risks and Benefits of DeFi
Latest Cryptocurrency News

European Regulator Emphasizes Both Risks and Benefits of DeFi

The European Securities and Markets Authority (ESMA), the financial markets supervisory authority of the European Union, issued a report on decentralized finance (DeFi) and the associated risks to the EU market on October 11.

In a comprehensive 22-page document, ESMA acknowledges the potential benefits of DeFi, which include increased financial inclusion, the development of innovative financial products, and improvements in the speed, security, and cost-effectiveness of financial transactions.

However, the report also underscores the “significant risks” inherent in DeFi. According to ESMA, the primary concern is liquidity risk due to the speculative and highly volatile nature of many crypto assets. The authority compares the 30-day volatility of Bitcoin and Ether with the Euro Stoxx 50 index, finding that cryptocurrencies exhibit significantly higher volatility, with averages of 3.6 and 4.7 times higher than the stock index.

ESMA remains skeptical about DeFi’s ability to eliminate counterparty risk, despite the theoretical expectation of lower or non-existent risk due to the use of smart contracts and atomicity. The report highlights that smart contracts are susceptible to errors or vulnerabilities. DeFi is particularly vulnerable to scams and illicit activities because it lacks Know Your Customer (KYC) protocols. Another notable risk factor for DeFi users, as detailed in the report, is the absence of a clearly identifiable responsible party and the lack of a recourse mechanism.

However, the report concludes that, at present, DeFi and the broader crypto market do not pose “meaningful risks” to financial stability. This is due to their relatively small size and limited interconnectedness with traditional financial markets.

ESMA has been closely monitoring the crypto market and recently issued its second consultative paper on regulations for Markets in Crypto-Assets on October 5. In this 307-page document, the regulator proposed allowing crypto asset providers to store transaction data in a format of their choosing, provided they can convert it into a specified format if requested by authorities.

Image by Freepik

Related posts

Fintech Investments To Be Prioritized in France and Germany in 2023 Using Crypto

Cheryl  Lee

Improbable Sells Gaming Venture for $97M, Eyes 2024 Metaverse

Chloe Taylor

Arrow Markets Revolutionizes DeFi Options Trading on Avalanche

Kevin Wilson

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More