Crypto and DeFi in Europe: Here is ESMA’s assessment

It’s a fact: decentralized finance (or DeFi) and crypto are indeed present on the European market. In a detailed report, the European Securities and Markets Authority (ESMA) closely examines this new financial era. More details in the paragraphs that follow!

“DeFi and crypto do not yet constitute a threat”, says ESMA

“DeFi and crypto do not constitute a risk for financial stability”, according to ESMA

In a report published on October 11, ESMA assesses the developments as well as the risks associated with DeFi and crypto within the European Union. According to the regulator, DeFi and crypto do not yet constitute a “significant risk” for overall financial stability.

This ESMA conclusion on DeFi and crypto is based on several key factors. First of all, the size of DeFi is relatively modest compared to traditional EU financial institutions.

  • The total market for crypto assets (including DeFi) is only a little over $1 trillion.
  • The total value locked (TVL) in DeFi, meanwhile, stands at just $40 billion.
  • In comparison, the total assets of EU financial institutions were around $90 trillion in 2021 (according to the European Commission).

THE ESMA studies also focused on several crypto contagion events in 2022. We mainly cite the collapse of the Terra ecosystem and FTX. According to the regulator, these crypto events had little significant impact in traditional financial markets.

What are the risks and benefits for the EU?

The ESMA report highlights several benefits of DeFi and crypto. This includes :

  • increased financial inclusion,
  • the development of innovative financial products,
  • a marked improvement in the speed, security and costs of financial transactions.

ESMA nevertheless maintains that the risks of DeFi and crypto are not negligible. According to this organization, liquidity constitutes the main risk. Due to the volatility of crypto assetsDeFi is subject to rapid and unpredictable price fluctuations.

The ESMA thus compares the 30-day volatility of the crypto currencies Bitcoin and Ethereum to the Euro Stoxx 50 index. The first is on average 3.6 to 4.7 times higher than the second.

Other risk to consider: the vulnerability of DeFi to scams and illicit activities. This is mainly due to the lack of identity verification or KYC protocols.

Although vigilant, ESMA therefore believes that DeFi and crypto do not threaten the financial stability of the EU. For now anyway!

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