The European Securities and Markets Authority (ESMA) warned of ‘serious risks’ that investors could be harmed by decentralized finance (DeFi) in a Wednesday report despite the fact that the innovative technology is still in its infancy.
ESMA, an EU agency that will set rules under the bloc’s flagship Markets in Crypto Assets Regulation (MiCA), vowed to look further into the emerging market, which has presented a puzzle for policy makers accustomed to legal obligations to be imposed on centralized entities. such as banks or stock exchanges.
“While investor exposure to DeFi remains low overall, there are serious risks to investor protection, due to the highly speculative nature of many DeFi schemes, significant operational and security vulnerabilities, and the lack of a clearly identified responsible party” , the report said. prepared by the Paris-based agency, with promising annual reports on the sector.
While DeFi – which uses smart contracts to automatically execute loans or other financial services – in principle carries less risk of counterparty default, the report finds increased volatility in the crypto markets and anonymity enabling questionable behavior such as wash -trading, where sales volumes are inflated to manipulate the markets.
ESMA made a whole series of proposals last week new rules for crypto asset service providers under MiCA, such as the environmental information to be included in issuers’ white papers. a further notice on Wednesday highlighted the potentially innovative nature of the smart contracts used in DeFi, noting that they can range from financially motivated Ponzi schemes to operational memory management.
ESMA isn’t the only regulator wondering how to handle DeFi projects, and the International Organization of Securities Commissions recently proposed putting them on par with conventional finance. The lobby group did this following a consultation with the French financial regulator AMF EU Crypto Initiative recently argued that DeFi needs a tailored approach – where programmers are not held legally liable just because they realize their code can be exploited.