- ESMA report underlines the increasing complexity of DeFi with several protocols being built on top of each other.
- The report categorizes smart contracts into five groups, a step towards its potential inclusion in future regulatory frameworks like MiCA.
- The set of clear rules has made way for more crypto businesses applying for licenses in the region.
The European Securities & Markets Authority (ESMA) released a comprehensive report on challenges that decentralized finance (DeFi) presents to regulations on Wednesday. The document identifies five main categories of smart contracts ahead of the implementation of the Markets in Crypto-Assets (MiCA) framework.
European regulator finds latest DeFi launches complex
One of the standout findings in ESMA's report is the contrast between the first surge of smart contract deployment in 2017 and 2018 against the second wave seen between 2021 and 2023. The regulator underlines that there is growth in the complexity of smart contracts due to the adoption of more sophisticated protocols.
The report finds that the DeFi industry has matured and a new generation of smart contracts that focus on complex applications has emerged. This includes derivatives management, prediction markets, insurance, yield farming, stablecoins and decentralized asset management. The watchdog now defines smart contracts across five categories: financial, operational, token, wallet and infrastructure.
Crypto businesses expand into the EU
ESMA also notes the potential of smart contracts in financial innovation, primarily due to their composability feature that allows open-source integration and interaction of decentralized applications (dApps).However, the agency highlights several risks associated with the sector, including the inability to modify or terminate smart contracts, transaction-ordering dependency, timestamp dependency, lack of accountability, and the rise of illicit smart contracts.
Moreover, ESMA finds that the dependency risk is a significant concern with smart contracts built on one another, making the entire system more interconnected and vulnerable to potential failure.
But amid clearer rules in the region, new businesses are expanding their footprint. Recently, digital bank Xapo secured a securities broker license in Europe that allows it to trade stocks while expanding its cryptocurrency wealth management services. Based on a report by Bloomberg, crypto exchange Deribit is next in line for a brokerage license in the European Union.
The report comes ahead of the MiCA framework, which is scheduled for broader implementation by December 2024. The EU members gave a green light to the set of rules earlier in May.
MiCA timeline
The ESMA report offers an overview into DeFi categories that may find their place within more comprehensive regulatory frameworks like MiCA. Especially when MiCA, as a European-level legal framework, does not encompass direct regulation of DeFi. The agency also highlights the necessity for ongoing monitoring in the DeFi space, which could lay the foundation for new regulatory measures.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
Turn off Solana and win $400,000 - Solana Foundation executive announces offer
Solana has been touted as an Ethereum killer, but as with every blockchain in the crypto market, the network does not come without its fair share of issues. While many who get hacked or exploited deal with the issues after the fact, Solana intends to get a step ahead by making a very lucrative offer to white hat hackers.
Grayscale vs. SEC deadline: Commission faces a midnight Friday deadline to challenge August 29 loss
Grayscale Investments secured a resounding victory in its longstanding case against the US Securities and Exchange Commission in late August. The lawsuit started in October after the firm approached the D.C. Circuit Court pushing to have its Bitcoin Trust converted to an Exchange-traded fund.
Loom Network price hits strong weekly resistance after 32% surge as LOOM ranks high on Korea’s Upbit
Loom Network token is highly bullish, passing as a rather lucrative investment for scalping traders, buying and selling the asset within a short period to make small profits.
Voyager founder charged by CFTC for fraud and by FTC for misleading investors that lost $1 billion
Voyager was among the first crypto companies to collapse and file for bankruptcy in 2022. While the platform has been making efforts to return its customers' assets since then, it looks like the regulatory bodies are not willing to be patient.
Bitcoin: Can BTC bears challenge crypto’s 2023 bull rally?
Bitcoin (BTC) price is at a critical juncture in the weekly time frame, where bulls and bears are battling for control. However, a multi-time-frame analysis shows that BTC is bullish daily and is likely to rally higher.