European Securities Authority States DeFi No Immediate Threat but Requires Monitoring
Summary:
The European Securities and Markets Authority (ESMA) has stated that Decentralized Finance (DeFi) currently presents no significant threat to financial stability but warrants continuous monitoring. ESMA recently released a report comparing the size of the total crypto market to the EU's twelfth-largest bank and revealing that crises such as the Terra ecosystem and FTX collapse didn't significantly affect traditional markets. It further emphasized several risks associated with DeFi, including its similarities to traditional finance vulnerabilities, the highly speculative nature of many DeFi arrangements, and operational and security vulnerabilities. The report also identified a concentration risk with DeFi activities, warning that the failure of any significant protocols could impact the entire system. ESMA has heightened scrutiny of DeFi and crypto markets in the wake of its second consultative paper on the Markets in Crypto Assets (MiCA) regulations.
Europe's financial markets and securities regulator, the European Securities and Markets Authority (ESMA), has announced that Decentralized Finance (DeFi) is currently not a significant threat to overall financial stability, although it needs ongoing surveillance. The ESMA recently shared a report, 'Decentralized Finance in the EU: Developments and Risks', on October 11, highlighting the advantages and challenges within the budding DeFi realm yet concluded that it hasn't posed a substantial threat to financial stability yet. The authority points out that markets dealing with crypto-assets, including DeFi, are relatively small and have limited ties with the traditional financial markets, thus exhibiting minimal risk to financial stability. According to DefiLlama, the total market capitalization for crypto stands just more than $1 trillion and the total DeFi value is approximately $40 billion. Comparatively, European Union financial institutions' total assets were around $90 trillion in 2021, as per the European Commission. The ESMA established that the entire crypto market size matches the twelfth-largest bank in the EU or 3.2% of all assets held by EU banks. ESMA closely analyzed several crypto crises in 2022, like the Terra ecosystem downfall and FTX collapse, noting that these events didn't significantly impact the traditional markets even as they mirrored a crypto "Lehman moment." The authority noted that DeFi shares some vulnerabilities with conventional finance like liquidity mismatch, maturity, leverage, and interconnectivity. Moreover, although the exposure of investors to DeFi remains negligible, it underlined the grave risks due to many DeFi arrangements being highly speculative, accompanied by severe operational and security vulnerabilities, and devoid of a clearly responsible entity. ESMA warned that these factors could potentially result in systemic risks if DeFi gained significant momentum or formed material links with traditional financial markets. The report also recognized a “concentration risk” in DeFi activities since a small number of protocols concentrated DeFi undertakings, and the failure of any of these could send shockwaves through the entire system. Post the publication of its second consultative paper on the Markets in Crypto Assets (MiCA) regulations earlier this month, ESMA has been closely scrutinizing DeFi and crypto markets.
Published At
10/12/2023 4:11:56 AM
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