EBA & ESMA Report on DeFi and Crypto-Asset Trends in Lending & Staking

Key findings from the report include:

• The nature of DeFi protocols involves a number of ICT risks related to the infrastructure on which it relies, including cross-chain bridges, oracles and smart contracts, and these risks may also be compounded by governance vulnerabilities. The report also links these risks with the recent Digital Operational Resilience Act, encouraging in-scope entities (e.g. CASPs) engaging with DeFi to consider these risks.
• The report includes a section on DeFI's ML/TF risks, which are considered as significant, notably due to the absence of AML/CTF checks. The attention of CASPs is called to the EBA's guidelines on ML/TF risk factors, which list transactions to/from DeFi platforms as a factor that may increase ML/TF risk.
• On lending, borrowing and staking, the report describes several current business models, and highlights a number of risks from these activities, notably around customer protection given how users may receive insufficient information on the conditions of these services, as well as legal risk resulting from the potential commingling of assets and lack of resolution mechanisms when significant incidents occur.

✅ While DeFi and lending, borrowing and staking activities are not currently regulated in the EU, the report includes interesting insights on inherent risks and potential risk mitigation for entities, notably CASPs, that interact with these protocols.

✅ In addition, the report provides a forward-looking view on items that regulators may consider as they move to regulate DeFi and lending, borrowing and staking activities, so entities providing these services can benefit from anticipating this as they design their products.

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