The report focuses on decentralised finance (DeFi), crypto lending, borrowing, and staking. This contribution supports the European Commission’s report to the European Parliament and Council under Article 142 of the Markets in Crypto-Assets Regulation (MiCAR).
DeFi adoption and risks highlightedAccording to the report, DeFi remains a niche sector, with the total value locked in DeFi protocols accounting for just 4% of the global crypto-asset market value. While EU adoption of DeFi exceeds the global average, it lags behind other advanced economies such as the US and South Korea.
The report also underscores a correlation between the size of the DeFi market and the number of security breaches. Hacks and thefts in DeFi have risen alongside the sector’s growth, posing significant risks. Furthermore, decentralised exchanges account for 10% of global spot crypto trading volumes, raising concerns about their vulnerability to money laundering and terrorist financing (ML/TF).
The report identifies maximal extractable value (MEV) as a critical issue in DeFi. MEV creates negative externalities across the ecosystem, which the EBA and ESMA suggest will require technical solutions to mitigate.
The joint report provides an overview of the lending, borrowing, and staking services in the crypto-asset market. These activities are conducted through both centralised and decentralised platforms, with some crypto-asset service providers (CASPs) in the EU also offering regulated services.
Engagement with crypto lending, borrowing, and staking remains limited among EU consumers and financial institutions. The report outlines key risks associated with these activities, including excessive leverage, information asymmetries, and exposure to ML/TF risks. Systemic concerns, such as collateral chains, re-hypothecation, and procyclicality, are also highlighted.
The report notes insufficient transparency regarding fees, interest rates, and collateral requirements, leaving some users vulnerable to inadequate disclosures. However, the EBA and ESMA do not currently identify significant risks to financial stability from these activities.
Under Article 142 of MiCAR, the European Commission is tasked with assessing the development of DeFi and the regulatory needs of decentralised systems and crypto-asset lending and borrowing. The EBA and ESMA's contribution provides detailed insights to inform these evaluations.
The report emphasises the need for a balanced regulatory approach to address emerging risks while fostering innovation in the sector. The EBA and ESMA will continue monitoring developments in crypto-assets as part of their broader mandate to oversee innovative activities in the EU’s banking, payments, and securities sectors.
By shedding light on these critical issues, the report aims to support the EU’s efforts to develop a comprehensive regulatory framework for crypto-assets and DeFi.
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