The European Securities and Markets Authority (ESMA) has raised concerns about decentralized finance (DeFi) in a 22-page report released on October 11.
While acknowledging the potential benefits of DeFi, such as increased financial inclusion and faster, more secure transactions, ESMA alos highlights significant risks.
These include liquidity risk due to the volatile nature of many cryptocurrencies, counterparty risk despite smart contracts, the vulnerability to scams and illicit activities due to the lack of Know Your Customer (KYC) protocols, and the absence of an identifiable responsible party.
ESMA report finds that DeFi and crypto do not pose significant risks to financial stability due to their small size and limited ties to traditional markets. ESMA is actively monitoring the crypto industry and has released its second consultative paper on crypto regulations.
ESMA’s cautious approach to DeFi highlights the importance of addressing its risks. Still, its acknowledgment of the limited current impact on financial stability reflects the evolving nature of this emerging sector.