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Decentralised Finance (DeFi)


Decentralised finance (DeFi) refers to financial applications run on a permissionless blockchain, such as Ethereum, that use smart contracts automating the provision of financial services without the need for intermediaries. DeFi is only a small share of the crypto market at present with less than 100 Bio $ locked in DeFi protocols at the beginning of 2023, but it has experienced a steady growth over the last few years (despite a significant drop in 2022) and the number of live DeFi protocols is increasing.

In terms of activities, DeFi is mainly used at present as an additional way to speculate on cryptoassets and obtain leverage (e.g. investment in cryptoassets on decentralised crypto exchanges (DEX), automated collateralised crypto lending and staking services). However, DeFi protocols can also potentially be used to provide traditional financial services (such as lending, derivatives, insurance, crowdfunding…) in a more efficient manner, based on crypto or tokenised assets and the use of smart contracts and without the use of financial intermediaries. In addition, the technical features underlying DeFi (smart contracts, composability) and some services provided on DeFi platforms (e.g. flash loans, automated market making) are quite innovative and could be taken advantage of in the future in the traditional financial sector or to reap the benefits of digital assets and the potentialities of Web3.

DeFi activities also give rise to new risks. The risks associated with unregulated crypto activities (market, liquidity, counterparty, AML risks…) and the growing interactions with the traditional financial system (due to the growing involvement of institutional investors in crypto and banks serving the crypto ecosystem) may indeed be amplified by the pseudo-anonymity on DeFi platforms and certain specific features of DeFi platforms. These include the automaticity of smart contracts and the use of oracles to connect to outside sources of data. In addition the decentralized governance of DeFi platforms based on governance tokens is a further source of potential vulnerability, although most DeFi platforms remain fairly centralized at present, as shown notably by BIS studies.

A further issue is that DeFi will not be explicitly covered by the upcoming MiCA framework, thus extending the period during which these activities will remain mostly unregulated. Access to DeFi platforms can also be challenging, as interacting directly with DeFi applications requires computer programming skills.

Eurofi documents

Extracted from the main Eurofi publications (Regulatory Updates, Views Magazines and Conference Summaries)

Eurofi Views Magazine chapters

DeFi opportunities and challenges - September 2023 new

Olivier Fliche - Autorité de Contrôle Prudentiel et de Résolution (ACPR) | Līga Kļaviņa - Ministry of Finance of the Republic of Latvia | Richard Teng - Binance | Marco Santori - Kraken Digital Asset Exchange

The potential of crypto technology in finance - April 2023

Sébastien Raspiller - Ministry of the Economy, Finance and Industrial and Digital Sovereignty, France | Richard Knox - HM Treasury | Jochen Durr - SIX Group Services AG | Daniel Kapffer - DekaBank Deutsche Girozentrale | Philippe Bordenave - BNP Paribas

DeFi prospects and regulatory implications - September 2022

Iota Nassr - Organisation for Economic Co-operation and Development | Fernando Restoy - Financial Stability Institute | Martin Moloney - International Organization of Securities Commissions | Jennifer Peve - The Depository Trust & Clearing Corporation | Geoffrey Kot - Standard Chartered Bank

DeFi finance: prospects and policy challenges - February 2022

Robert Ophèle - Autorité des Marchés Financiers | Iota Nassr - OECD | Jos Dijsselhof - SIX Group Services AG | Delphine d’Amarzit - Euronext | Swen Werner - State Street Bank and Trust