ESMA: DeFi comes with significant risks as well as benefits

The European Securities and Markets Authority (ESMA), the EU’s financial markets supervisory authority, has released an article on decentralised finance (DeFi) and the risks it poses to the EU market, reports Cointelegraph.  

In a 22-page report, the ESMA admits the promised benefits of DeFi, such as greater financial inclusion, the development of innovative financial products, and the enhancement of financial transactions’ speed, security and costs.

However, the paper also highlights the “significant risks” of DeFi. According to the ESMA, the first is liquidity risk tied to the highly speculative and volatile nature of many crypto assets. The authority compares the 30-day volatility of Bitcoin and Ether with the Euro Stoxx 50 index, with the cryptocurrencies being, on average, 3.6 and 4.7 times higher than the stock index.

The ESMA doesn’t believe that DeFi manages to avoid counterparty risk, even if, in theory, it should be lower or even non-existent due to smart contracts and atomicity. However, smart contracts are not immune to errors or flaws.

DeFi is especially vulnerable to scams and illicit activities as it lacks Know Your Customer (KYC) protocols, according to the ESMA. Another important source of risk for DeFi users, as specified in the report, is the lack of an identifiable responsible party and the absence of a recourse mechanism.

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