Kenne Michael 
According to the European Union’s financial markets and securities regulator, decentralized finance (DeFi) has yet to pose a significant danger to global financial stability, but it does require monitoring.
The European Securities and Markets Authority (ESMA) released a report titled Decentralized Finance in the EU: Developments and Risks on October 11.
In addition to discussing the ecosystem’s benefits and hazards, the regulator concluded that it has not yet posed a significant threat 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 total value secured is a mere $40 billion, according to DefiLlama.
According to the European Commission, the total assets of financial institutions in the EU amounted to approximately $90 trillion in 2021.
However, based on the report, the total crypto market is roughly equivalent in size to the thirteenth largest bank in the EU, or 3.2% of the total assets held by EU banks.
The ESMA examined several crypto contagions of 2022, such as the collapse of the Terra ecosystem and FTX, remarking that this crypto “Lehman moment” had “no meaningful impact on traditional markets.”
Nonetheless, the regulator observed that DeFi shares similar characteristics and vulnerabilities with conventional finance, including liquidity and maturity discrepancies, leverage, and interconnectedness.
Even though investors’ exposure to DeFi remains low, there are still significant 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,” the report stated.
It warned 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.”
In addition, the report identified a “concentration risk” linked to DeFi activities.
“DeFi activities are concentrated in a small number of protocols,” the report states, adding that the three largest protocols account for 30% of the TVL.
“The failure of any of these large protocols or blockchains could reverberate across the whole system,” it said.
Following the release of its second consultative paper on Markets in Crypto Assets (MiCA) regulations earlier this month, the regulator is paying significantly more attention to DeFi and crypto markets.
