In a 22-page analysis published on October 11th, the European Securities and Markets Authority (ESMA) expressed concerns about decentralized financing (DeFi).
DeFi may lead to greater financial inclusion and quicker, more secure transactions, but there are serious hazards as well, according to ESMA.
These include counterparty risk despite smart contracts, liquidity risk brought on by the volatility of certain cryptocurrencies, vulnerability to frauds and illegal activity brought on by a lack of Know Your Customer (KYC) requirements, and the lack of a clearly defined responsible party.
Due to their tiny size and tenuous linkages to established markets, the ESMA research concludes that DeFi and cryptocurrency do not represent substantial risks to financial stability. ESMA has published its second consultative paper on crypto rules and is actively following the cryptocurrency sector.
The importance of tackling DeFi’s hazards is highlighted by ESMA’s circumspect attitude to the topic. Although it acknowledges the modest current impact on financial stability, this nascent sector is still in the process of developing.
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