The European Banking Authority and European Securities and Markets Authority’s analysis highlights the niche status of Defi, systemic risks in crypto services, and Europe’s below-average adoption compared to leading global markets. Photo: Shutterstock

The European Banking Authority and European Securities and Markets Authority’s analysis highlights the niche status of Defi, systemic risks in crypto services, and Europe’s below-average adoption compared to leading global markets. Photo: Shutterstock

A joint report from the European financial regulators EBA and Esma reveals that Defi comprises 4% of the global crypto market, while EU adoption lags other economies, with risks identified in lending, staking and money laundering.

European regulators identified limited financial stability risks from crypto lending and staking but raised significant concerns regarding money laundering and terrorist financing (ML/TF) vulnerabilities, challenges posed by maximal extractable value (MEV) and inadequate consumer information. These findings were part of a joint report on 16 January 2025 by the European Banking Authority (EBA) and the European Securities and Markets Authority (Esma). The report analysed trends in crypto-assets, decentralised finance (Defi) and services such as crypto lending, borrowing and staking, contributing to the European Commission’s review for the European Parliament and Council under the markets in crypto-assets regulation (Mica).

The report revealed that Defi remains a niche sector in the global crypto-asset landscape, with value locked in Defi protocols accounting for just 4% of global crypto-asset market value. While the EU showed above-average Defi adoption compared to global figures, it lagged behind other developed economies, including the United States and South Korea.

A correlation between the prevalence of Defi hacks and the market’s size was observed, with decentralised exchange flows representing 10% of global spot crypto trading volumes. This substantial share underscored the ML/TF risks associated with Defi protocols, a significant concern highlighted by the EBA and Esma.

The implications of MEV, a phenomenon pervasive in Defi markets, were also discussed in the report. The regulators described its negative externalities and emphasised the need for technical solutions to mitigate these impacts.

In examining crypto lending, borrowing and staking, the report outlined the business models and characteristics of these services in both centralised and decentralised contexts. These services, frequently offered by crypto-asset service providers (Casps) in the EU, sometimes overlap with regulated crypto-asset offerings. However, consumer and institutional engagement with these services in the EU remains limited, according to the report.

The EBA and Esma identified several risks tied to these activities, including excessive leverage, information asymmetries, exposure to ML/TF and systemic vulnerabilities from practices such as re-hypothecation, collateral chains, procyclicality and interconnectedness. Additionally, some users were found to lack adequate information on essential terms, such as fees, interest rates, yield calculations and changes in collateral requirements. Despite these identified risks, the report concluded that there were no immediate financial stability concerns stemming from these activities.

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