European regulator assesses risks of crypto market and DeFi
European regulator assesses risks of crypto market and DeFi
The European Securities and Markets Authority (ESMA) has conducted a study on the impact of the cryptocurrency market and decentralized finance (DeFi).
The regulator published the report titled "Finance in the EU: Developments and Risks", and after assessing the risks and characteristics of the new ecosystem, ESMA concluded that there are not yet significant risks to financial stability from DeFi.
The report states, "Crypto-assets markets, including DeFi, do not represent meaningful risks to financial stability at this point, mainly because of their relatively small size and limited contagion channels between crypto and traditional financial markets."
According to statistics, the total capitalization of the cryptocurrency market has only reached $1 trillion, and the total value of DeFi blocked assets does not exceed $40 billion. For reference, in 2021, the total assets of the EU banking industry amounted to $90 trillion.
Thus, the total size of the crypto market is equivalent to the size of the twelfth largest European bank in the EU. It also represents 3.2% of the total assets of EU banks.
ESMA assessed the risk of a crisis in the industry along the lines of the global downturn in 2022 due to Terra and FTX, noting that the cryptocurrency downturn did not significantly affect traditional markets.
However, DeFi has similar vulnerabilities to traditional finance, including liquidity and maturity mismatches and leverage. Therefore, supervision of the DeFi market will be required due to the speculative nature of its mechanisms and the lack of a clearly defined responsible party.
ESMA said that as its popularity grows or links with traditional finance increase, the risks will be higher.
"DeFi activities are concentrated in a small number of protocols, with the three largest accounting for 30% of TVL," ESMA concluded.
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