The European Securities and Markets Authority (ESMA) has stated in a recent report that decentralized finance (DeFi) and cryptocurrency markets, despite their impressive growth, do not currently pose a significant risk to financial stability. This conclusion is due to the relatively small size of these markets, as the total crypto market capitalization accounts for about 3.2% of total assets held by EU banks.
The report, released on Thursday, also highlighted the limited contagion between crypto markets and traditional finance, even during major events such as the crypto "Lehman moment". It noted that no substantial impact on traditional markets has been observed so far.
However, ESMA did warn of potential systemic risks if DeFi gains substantial traction or if its interconnections with traditional markets become material. The authority also pointed out the potential concentration risk with the three largest protocols representing 30% of DeFi's total value locked (TVL).
Additionally, ESMA expressed concerns over investor protection risks due to the speculative nature and operational vulnerabilities in DeFi. These concerns come amid ESMA's increased scrutiny following its second consultative paper on Markets in Crypto-Assets (MiCA) regulations.
It is important to note that the total assets of EU financial institutions amount to approximately $90 trillion, which puts into perspective the current size of the crypto market.
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