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Legal regulations are among the most concerning issues in the cryptocurrency markets. Certain authorities continue to take different steps regarding this matter every day. On October 11th, the European Securities and Markets Authority (ESMA), the central authority responsible for supervising the financial markets of the European Union, published an article about decentralized finance platforms (DeFi). The article discussed the risks posed by the DeFi sector for EU markets.
Risks Presented for Crypto Assets
The 22-page report highlighted the positive views expressed about the DeFi sector. ESMA officials acknowledged the financial inclusion, development of innovative financial products, and the fast, reliable, and cost-effective nature of financial transactions in this sector.
However, the report also addressed the risks that raise questions in everyone’s minds. According to experts, the first and most important issue is the liquidity problems of assets traded in this sector. Speculative transactions stand out in an environment with low trading volume compared to traditional markets, and therefore, the volatility does not inspire confidence in every investor.
To better understand the subject, experts compared the 30-day transaction volatility of Ethereum and Bitcoin with the Euro Stoxx 50 index of the EU traditional market. As a result, it was revealed that the volatility levels of crypto assets were 3.6 times higher than the stock index.
DeFi Sector is Not Secure Enough
According to the ESMA report, an intelligent contract is required to be able to transact in the DeFi sector, and these smart contracts do not always exhibit a strong structure that is immune to attacks and errors. Therefore, the DeFi sector is not yet secure enough for authorities.
Another issue is that the Know Your Customer (KYC) protocol provided by centralized exchanges is not yet required in this sector. Therefore, the DeFi sector is vulnerable to fraud and illegal activities. Additionally, DeFi users face another risk in that they will not be able to find a responsible party in case of any negative situation. Therefore, although users may want to exercise their legal rights, there is currently no mechanism in place for this.
The European Securities and Markets Authority had previously published a document regarding regulations for cryptocurrency markets on October 5th. This also demonstrates the institution’s close interest in crypto assets. The 307-page document presented a series of proposals for companies providing crypto services.