The European Securities and Markets Authority (ESMA) has published a research paper on decentralized finance (defi).
THE paper was published on October 11 as part of ESMA’s “Trends, Risks and Vulnerabilities” report.
Defi is a new way of providing financial services without relying on centralized intermediaries but rather on automated protocols based on blockchain technology.
Defi arrangements are often highly speculative and vulnerable to operational and security issues. Defi also creates new forms of market manipulation that must be combatted.
Research shows that the challenge remains very small relative to the total cryptoasset market but requires close monitoring. The report also presents a methodology for categorizing smart contracts, which are the essential components of defi protocols.
The process uses the source code of smart contracts and thematic modeling to identify five broad categories of smart contracts and their relative impact over time.
The document contributes to a better understanding of the challenge and its evolution and identifies the associated risks. The report also provides advice and input to EU institutions on the regulatory framework for crypto-assets, such as the proposed regulation of crypto-asset markets (Mica) and the pilot scheme for market infrastructures based on distributed ledger technology (DLT pilot scheme).
How Europe regulates the challenge
Currently, there is no specific regulatory framework for the challenge sector in European countries. The challenge regulatory landscape in Europe continues to evolve and different countries have taken different approaches to addressing the challenges and risks associated with decentralized finance.
Some European countries have chosen to regulate certain aspects of the challenge within existing financial regulations. For example, in Germany, challenge platforms that offer financial services may fall within the scope of the country’s banking and securities laws. Similarly, in the UK, the Financial Conduct Authority (FCA) has stated that certain challenge activities may fall within the regulatory scope and require authorization.
It is worth noting that the Global Defi Coalition, which includes European organizations such as Blockchain for Europe and CryptoUK, has forwarded proposals to the Financial Action Task Force (FATF) to regulate the DeFi space. These proposals aim to guide regulators in creating well-balanced rules that promote industry growth while addressing potential risks.