The European Securities and Markets Authority (ESMA) has published two articles on decentralised finance, the first discussing developments and risks in the EU market and the second introducing a methodology for the categorisation of smart contracts.
Through the publications, ESMA aims to share information on current risks to consumers and financial stability, and new forms of market abuse.
ESMA states that although DeFi has seen increased scale over recent years, it remains small scale. As a result, financial stability risks are currently not at a meaningful level, but the organisation warns that these must be monitored as DeFi continues to grow.
The first article describes the risks that DeFi poses to investor protection in the EU, due to the operational and security vulnerabilities of many DeFi arrangements and their speculative natures.
ESMA’s methodology for the categorisation of smart contracts, outlined in its second article, leverages topic modelling and smart contracts’ source code. Five main smart contract categories are identified, with the relative incidence of each monitored over time. The article finds that increasingly complex and independent protocols have come to characterise DeFi over time.
Through this report, the organisation aims to provide an “enhanced and nuanced understanding” of DeFi and the risks associated with it.
