European Union: Published ESMA Risk Analysis on Decentralised Finance in the EU

On 11 October 2023, the European Securities and Market Authority (ESMA) released a Risk Analysis on Decentralised Finance (DeFi) report in the European Union. The analysis explored regulatory challenges associated with DeFi, highlighting that it could potentially pose risks to users and financial stability, underscoring the need for appropriate regulation. This regulatory framework should consider the unique characteristics of DeFi and amalgamate various approaches. The ESMA report outlines several regulatory options, including reinforcing blockchain infrastructures' security, potentially achieved through certifying blockchains according to minimum security standards. Moreover, the report recommends enhancing the security of smart contracts through a certification mechanism encompassing code security, the nature of the provided service, and governance. Finally, the report suggests a framework for delivering services and user access, which may involve establishing statutes for certain service providers through a centralisation process, wherein entities with effective control over sensitive services could be mandated to incorporate and be subject to supervision.