EU’s Securities Regulator Weighs In On The Risk and Benefits of DeFi to the Economy
The European Securities and Market Authority (ESMA) has released a report on the development of decentralized finance (DeFi) and the risk posed by growing adoption.
In a report released on Oct 11, the 22-page document highlights the risks posed by a sector that holds much promise and reshaped finance in the region.
According to the document, the DeFi has led to the innovation of financial products making payments easier and aiding financial inclusion to cater to the unbanked around the world.
ESMA stated that the development of DeFi has notched several positives relating to transaction speed, cost, and security to an extent against traditional finance but added that its application in some areas poses a significant risk.
“DeFi could contribute to greater financial inclusion by allowing users to access products and services without an intermediary who may selectively restrict access.”
Still on the positive, the document recommends the openness of blockchain technology as it records transactions on immutable blocks without the existence of intermediaries and “central counterparties.”
Smart contracts made decentralized finance possible creating “innovative financial products” that range from futures contracts, automated market makers, flash loans, etc.
Despite the many innovations, DeFi products endanger the market in many ways drawing the attention of regulators globally.
ESMA cited liquidity risk on financial assets in the market based on its high volatility resulting in loss of investments. The disparity in liquidity risk can be seen in the 30-day volatility of the cryptocurrency and traditional stock markets.
The 30-day volatility of Bitcoin and Ethereum ranges between 3.6 and 4.7 times more than the Euro Stoxx 50 index.
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