As the world of cryptocurrencies continues to expand, the European Securities and Markets Authority (ESMA) has decided to turn its eyes to one particular segment of this market: Decentralized Finance, or DeFi.
In an attempt to understand and, perhaps more importantly, regulate this emerging market, ESMA published recently two articles that dive deep into the DeFi ecosystem.
The main argument highlighted by the authority is the concern with investor protection. They mention that DeFi, with its highly speculative nature, can lead to operational and security risks. However, it is interesting to note that even with all these concerns, ESMA believes that DeFi does not pose a significant risk to financial stability as a whole.
One of the reasons for such a statement could be the current capitalization of Decentralized Finance in relation to cryptocurrency market in general. To give you an idea, the numbers show that the Total Value Locked (TVL) in DeFi was $45 billion in June this year.
This may seem like a lot, but when we put it into perspective with the total cryptocurrency market capitalization, which stood at around $1,06 trillion, this figure represents just 4%. Even more intriguing is that since then, the total recorded value has decreased to $36,9 billion, which is equivalent to about 3,5% of the total cryptocurrency market.
Although the focus has been mainly on risks, it is clear that ESMA also recognizes the growing relevance of Decentralized Finance. And as the discussion progresses, the balance between innovation and regulation will be crucial to ensure that investors are protected, but without stifling the innovation that is the hallmark of this sector.
