Decentralized finance yet to pose ‘meaningful risk’ to stability — EU regulator
Decentralized finance (DeFi) is yet to pose a meaningful risk to overall financial stability but does require monitoring, according to the European Union’s financial markets and securities regulator.
On Oct. 11, the European Securities and Markets Authority (ESMA) released a report titled “Decentralized Finance in the EU: Developments and Risks.” Aside from discussing the nascent ecosystem’s benefits and risks, the regulator concluded it is yet to pose a sizeable risk to financial stability.
“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.”
The total crypto market capitalization is just over $1 trillion, and DeFi’s total value locked (TVL) is a mere $40 billion, according to DefiLlama. Comparatively, the total assets of financial institutions in the EU amounted to around $90 trillion in 2021, according to the European Commission.

The report said that the total crypto market is about the same size as the EU’s 12th largest bank, or 3.2% of the total assets held by EU banks.
The ESMA also looked into several crypto contagions of 2022, including the collapse of the Terra ecosystem and FTX, noting that this crypto “ Lehman moment ” still had “no meaningful impact on traditional markets.”
Nevertheless, the regulator observed that DeFi has similar traits and vulnerabilities to traditional finance, such as liquidity and maturity mismatches, leverage and interconnectedness.
It also highlighted that, although investors’ exposure to DeFi remains small, there are still serious risks to investor protection due to the “highly speculative nature of many DeFi arrangements, important operational and security vulnerabilities, and the lack of a clearly identified responsible party.”
It cautioned that this could “translate into systemic risks if the phenomenon were to gain significant traction and/or if interconnections with traditional financial markets were to become material.”
Related: EU’s new crypto law: How MiCA can make Europe a digital asset hub
Furthermore, the report identified a “concentration risk” associated with DeFi activities.
“DeFi activities are concentrated in a small number of protocols,” it noted, adding that the three largest ones represent 30% of the TVL.

“The failure of any of these large protocols or blockchains could reverberate across the whole system,” it said.
The regulator is paying much closer attention to DeFi and crypto markets following the publication of its second consultative paper on the Markets in Crypto-Assets (MiCA) regulations earlier this month.
Collect this article as an NFT to preserve this moment in history and show your support for independent journalism in the crypto space.
Magazine: Bitcoin is on a collision course with ‘Net Zero’ promises
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
You may also like
CloneX NFTs Hit a Wall as Images Vanish From OpenSea

SUI Jumps 73% After Grayscale and Mastercard Boost
SUI gains 73% in a week, driven by a Grayscale Trust listing and a strategic partnership with Mastercard.SUI Skyrockets After Major Institutional MovesMastercard Partnership Fuels Adoption HopesWhat’s Next for SUI?

Whale Buys Back 8K ETH, Nets $159K in 10 Days
Whale repurchases 8,012 ETH at $1,779, repays debt, and earns $159K from ETH trading over 10 days.Whale Re-Enters ETH With $14M BuybackSmart Debt Management and Strategic TimingProfit Through Precision

Solana Price Eyes $162, Cardano Slides Again, While Unstaked Presale Goes Viral in April 2025
Explore a timely comparison of Cardano, Solana, and Unstaked ($UNSD) focusing on real-time utility, price levels, and presale potential. Find out what crypto to invest in for both short-term strategy and long-term value.Cardano Slides Back Into Multi-Year RangeSolana Faces Crucial Test Near Largest Supply ClusterUnstaked Is More Than Hype: A Real Use Case in a Meme-Driven MarketUtility, Timing, and the Case for $UNSD

Trending news
MoreCrypto prices
More








