The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have published a joint report on recent developments in crypto-assets, focusing on decentralised finance (DeFi) and crypto-asset lending, borrowing and staking, as input to the European Commission’s report under Article 142 of the Markets in Crypto-Assets Regulation (MiCAR). The report finds DeFi remains a niche phenomenon and that, on limited evidence, EU consumers and financial institutions have limited engagement with crypto lending, borrowing and staking, while setting out key risks without identifying current financial stability risks. DeFi value locked represents around 4% of global crypto-asset market value, and EU adoption is described as above the global average but below other developed economies such as the US and South Korea. Flows on decentralised exchanges account for about 10% of global spot crypto trading volumes, leading the report to flag significant money laundering and terrorist financing risks, with hacking incidents and stolen values generally moving in line with DeFi market size; it also notes maximal extractable value (MEV) is widespread in DeFi and that its negative externalities would require technical solutions. For lending, borrowing and staking, the report reviews observed business models in centralised and decentralised forms and identifies risks including excessive leverage, information asymmetries, ML/TF exposure, and systemic risk channels linked to rehypothecation and collateral chains, procyclicality and interconnectedness, alongside concerns that users may receive insufficient information on fees, interest rates or yields, and changes to collateral requirements. Under Article 142, the European Commission is mandated to assess the appropriate regulatory treatment for decentralised crypto-asset systems without an issuer or crypto-asset service providers (CASPs), including the need for and feasibility of regulating DeFi, and the feasibility and necessity of regulating crypto-asset lending and borrowing. The EBA and ESMA plan to continue monitoring market developments as part of their ongoing mandate on innovative activities in EU banking, payments and securities markets.
European Securities and Markets Authority 2025-01-16
European Securities and Markets Authority and European Banking Authority publish joint report finding DeFi remains niche and mapping risks in crypto lending and staking
The European Banking Authority and the European Securities and Markets Authority released a joint report on crypto-assets, noting DeFi's niche status and limited EU engagement in crypto lending, borrowing, and staking. The report identifies significant money laundering and terrorist financing risks, alongside technical challenges like maximal extractable value (MEV) in DeFi. It reviews risks in lending and staking, including excessive leverage and information asymmetries, while the European Commission assesses regulatory needs under the Markets in Crypto-Assets Regulation.