EU Regulator: DeFi Poses Serious Risks to Investors

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  • EU regulator European Securities and Markets Authority (ESMA) thinks that decentralized finance exposes investors to serious risks
  • ESMA noted that the risks emanate from the industry’s “highly speculative nature” and security vulnerabilities on DeFi platforms
  • ESMA however thinks that DeFi is yet to pose any tangible threats to traditional finance

The European Securities and Markets Authority (ESMA), an EU regulator associated with the passing of the MiCA crypto law, has shared its thoughts on decentralized finance (DeFi) saying that it puts investors at serious risks. In a report published on October 11, ESMA noted that the harm comes from the industry’s “highly speculative nature” and is aggravated by the continuous security vulnerabilities faced by DeFi platforms. Although the regulator noted that the DeFi world doesn’t pose tangible threats to the legacy financial system, it added that the space needs to be monitored, suggesting that its growth trajectory is likely to present meaningful risk to traditional finance.

It’s Harmful to a Few People

The report, titled “Decentralized Finance in the EU: Developments and Risks,” stated that the decentralized world harms investors, but noted that the number of people exposed “to DeFi remains small overall.”

According to ESMA, the lack of a central authority to oversee DeFi operations puts investors at a disadvantage. The regulator disclosed that flash loan attacks are among some of the industry’s rampant market manipulation techniques used to steal user funds.

Some DeFi protocols to lose funds through this method include PancakeBunny which lost $200 million and Hundred Finance which lost over $7 million.

DeFi is Only $40 Billion of a $1 Trillion Market

On why DeFi is yet to impact traditional finance, ESMA said that the crypto market’s value is slightly above 3% of the value held by banks in the EU. Even in the crypto market, only $40 billion, out of the market’s $1 trillion capitalization, is locked in DeFi platforms.

With the regulator discrediting the impact of DeFi on conventional finance, it’s likely they’ll admit it when it’s too late, and probably try to curb it through regulations.