Two major European regulators issued a joint report analyzing DeFi and crypto lending and staking

PANews reported on January 17 that the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) jointly released a report today analyzing DeFi and crypto lending and staking. The report stated that DeFi is still a niche phenomenon, and the value locked in DeFi protocols accounts for 4% of the market value of all crypto assets worldwide. The report also pointed out that although the EU's adoption of DeFi is higher than the global average, it is lower than other developed economies (such as the United States and South Korea). In addition, the report pointed out that the number of DeFi hacker attacks and the value of stolen crypto assets are generally positively correlated with the size of the DeFi market; since the flow of decentralized exchanges accounts for 10% of the global spot cryptocurrency trading volume, DeFi protocols have serious money laundering and terrorist financing (ML/TF) risks. EBA and ESMA also found that the impact of maximum extractable value (MEV) on the DeFi market is very common in DeFi, and the negative externalities of MEV require technical solutions.

Regarding lending and staking of crypto assets, the report analyses the main types of business models and typical characteristics observed in the market, both centralized and decentralized. Based on the (limited) evidence available, participation of EU consumers and financial institutions in cryptocurrency lending and staking services appears to be limited. The report lists and assesses specific risks associated with each service, such as excessive leverage, information asymmetry, ML/TF exposure, and systemic risks arising from rehypothecation and collateral chains, procyclicality and interconnectedness. In particular, some users may not receive adequate information about the terms and conditions of these services in areas such as 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.