The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) published a joint report analysing recent developments in crypto-assets, focusing on decentralised finance (DeFi) and crypto lending, borrowing and staking. The report contributes to the European Commission’s assessment to the European Parliament and Council under Article 142 of the Markets in Crypto-Assets Regulation (MiCAR), identifying key risk channels while not finding current risks from a financial stability perspective. On DeFi, the report finds it remains a niche phenomenon, with value locked in DeFi protocols representing 4% of global crypto-asset market value, and EU adoption above the global average but below other developed economies such as the United States and South Korea. It notes that DeFi hacks and the value of stolen crypto-assets have generally evolved in correlation with DeFi market size and that decentralised exchange flows represent 10% of global spot crypto trading volumes, creating significant money laundering and terrorist financing risks. The report also finds that maximal extractable value (MEV) is widespread in DeFi and that its negative externalities would require technical solutions. On lending, borrowing and staking, it maps observed business models in centralised and decentralised forms, notes limited evidence of EU consumer and financial institution engagement, and assesses risks including excessive leverage, information asymmetries, ML/TF exposure, and systemic risks linked to re-hypothecation, collateral chains, procyclicality and interconnectedness, alongside concerns about insufficient user disclosures on fees, interest or yields and collateral changes. The report feeds into the European Commission’s Article 142 mandate to assess the development of DeFi and the feasibility and necessity of regulating decentralised crypto-asset systems without an issuer or crypto-asset service providers, as well as crypto-asset lending and borrowing. EBA and ESMA will continue monitoring market developments as part of their ongoing mandate covering innovative activities in EU banking, payments and securities.
European Banking Authority 2025-01-16
European Banking Authority and European Securities and Markets Authority publish joint report on decentralised finance and crypto lending under MiCAR review
The European Banking Authority and the European Securities and Markets Authority released a joint report on crypto-assets, focusing on decentralised finance (DeFi) and crypto lending, borrowing, and staking. Part of the European Commission's assessment under the Markets in Crypto-Assets Regulation, it identifies key risk channels but finds no current financial stability risks. It highlights DeFi's niche status, significant money laundering risks, and the need for technical solutions to address maximal extractable value (MEV) issues.