Two major regulatory agencies in Europe have released a joint report analyzing DeFi, cryptocurrency lending, and staking

The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) jointly released a report today analyzing DeFi as well as cryptocurrency lending and staking. The report states that DeFi is still a niche phenomenon, with the value locked in DeFi protocols accounting for 4% of the global market value of all encrypted assets. The report also points 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 points out that the number of DeFi hacker attacks and the value of stolen encrypted assets are usually positively correlated with the size of the DeFi market; Due to the fact that the traffic of decentralized exchanges accounts for 10% of the global spot cryptocurrency trading volume, DeFi protocols pose serious risks of money laundering and terrorist financing (ML/TF). 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. The report analyzes the main types of business models and typical features observed in the market regarding the lending and pledging of encrypted assets, including centralization and decentralization. Based on existing (limited) evidence, the participation of EU consumers and financial institutions in cryptocurrency lending and pledging services appears to be limited. This report lists and evaluates specific risks associated with each service, such as excessive leverage, information asymmetry, ML/TF risk exposure, and systemic risks caused by re collateralization and collateral chains, procyclicality, and interconnectivity. Especially, some users may not have received sufficient information regarding these terms and conditions of service in areas such as fees, interest rates or returns paid, changes in collateral requirements, and other related disclosures. However, the EBA and ESMA have not yet determined the current risks from the perspective of financial stability.