Decentralized finance yet to pose ‘meaningful risk’ to stability

Decentralized finance is yet to pose a meaningful risk to overall financial stability but does require monitoring, according to theEuropean Union’s financial markets and securities regulator. On Oct. 11, the European Securities and Markets Authority 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.

The ESMA also looked into several crypto contagions of 2022, including the collapse of the Terra ecosystem and FTX, noting that this crypto “Lehman moment” still had “no meaningful impact on traditional markets.” Nevertheless, the regulator observed that DeFi has similar traits and vulnerabilities to traditional finance, such as liquidity and maturity mismatches, leverage and interconnectedness.

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