EU Agencies Analyze DeFi and Crypto Lending Risks

According to PANews, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have released a joint report analyzing decentralized finance (DeFi) and crypto lending and staking. The report highlights that DeFi remains a niche phenomenon, with the value locked in DeFi protocols accounting for 4% of the global crypto asset market value. It also notes that while the European Union's adoption of DeFi is above the global average, it lags behind other developed economies such as the United States and South Korea. The report points out a positive correlation between the number of DeFi hacks and the value of stolen crypto assets with the size of the DeFi market. It also identifies significant money laundering and terrorism financing (ML/TF) risks within DeFi protocols, as decentralized exchanges account for 10% of global spot crypto trading volume. Additionally, the impact of maximum extractable value (MEV) is prevalent in the DeFi market, with its negative externalities requiring technical solutions. Regarding crypto asset lending and staking, the report examines the main business model types and typical characteristics observed in the market, including centralized and decentralized models. Based on limited existing evidence, the participation of EU consumers and financial institutions in crypto lending and staking services appears limited. The report lists and assesses specific risks associated with each service, such as excessive leverage, information asymmetry, ML/TF risk exposure, and systemic risks arising from rehypothecation, collateral chains, procyclicality, and interconnectedness. Particularly, some users may not receive adequate information about the terms and conditions of these services, including fees, interest rates or yields paid, changes in collateral requirements, and other relevant disclosures. However, the EBA and ESMA have not yet identified current risks from a financial stability perspective.