Decentralized finance (DeFi) is yet to pose a meaningful risk to overall financial stability but does require monitoring, according to the European Union’s financial markets and securities regulator.
On Oct. 11, the European Securities and Markets Authority (ESMA) released a report titled Decentralized Finance in the EU: Developments and Risks. Aside from discussing the nascent ecosystem’s benefits and risks, the regulator concluded it is yet to pose a sizeable risk to financial stability.
“Crypto-assets markets, including DeFi, do not represent meaningful risks to financial stability at this point, mainly because of their relatively small size and limited contagion channels between crypto and traditional financial markets.”
The total crypto market capitalization is just over $1 trillion, and DeFi total value locked is a mere $40 billion, according to DefiLlama. Comparatively, the total assets of financial institutions in the EU amounted to around $90 trillion in 2021, according to the European Commission.
The report said that the total crypto market is about the same size as the EU’s twelfth largest bank or 3.2% of the total assets held by EU banks.
The ESMA also looked into several crypto contagions of…
