Asset Management | Digital Transformation
Written by Sebastian Höft
Jan 24, 2025
The 2025 joint EBA-ESMA report highlights recent developments in crypto lending, borrowing, and staking, pivotal elements of decentralized finance (DeFi). Crypto lending involves transferring crypto-assets or funds to a borrower, secured by collateral, with repayment plus interest agreed for a future date. Conversely, crypto borrowing allows users to access funds while committing to similar repayment terms.
Crypto staking, integral to Proof-of-Stake blockchains, immobilizes assets to support consensus mechanisms, offering participants validator privileges and block rewards. However, these activities present significant risks, such as collateral chains that can trigger cascading liquidations, systemic liquidity crunches, and deleveraging spirals. Liquidity risks, market volatility, and the absence of creditworthiness checks amplify financial vulnerabilities. Additionally, the concentration of market activity among a few protocols, with 13 entities dominating 86% of the market, raises systemic concerns. Custody risks, operational challenges, and legal uncertainties further complicate these markets.
Currently, crypto lending operates in 16 EU member states, while staking is available in 23, with services provided by both centralized entities and DeFi protocols. EU markets for DeFi lending and borrowing are valued at €1.8 billion, and staking at €3.6 billion. The European Commission is set to integrate the report’s findings into its MiCAR analysis, with EBA and ESMA continuing their oversight of these emerging sectors. Decentralized Finance (DeFi) refers to financial applications built on blockchain networks that replicate traditional financial functions without intermediaries or centralized institutions.
Access to DeFi is available via decentralized application interfaces, self-custodial wallets, and centralized trading platforms. In the EU, DeFi remains a niche market, accounting for only 4% of the total crypto-asset market capitalization. Approximately 7.2 million EU users interact with DeFi, but fewer than 15% participate regularly.
The primary DeFi activities include staking, lending, borrowing, and exchanging crypto-assets. Stablecoins denominated in euros are a minimal presence in DeFi markets. Traditional EU financial institutions have limited exposure to DeFi, with low adoption rates of crypto technologies among banks and negligible investment in blockchain-focused funds.
DeFi faces risks from on-chain vulnerabilities, such as smart contract exploits and scams, and off-chain threats like phishing and private key compromises. The anonymity of self-custodial wallets poses regulatory challenges and potential misuse for illicit activities. The European Commission and EU authorities continue to monitor DeFi developments, focusing on opportunities and risks outlined in the EBA-ESMA 2025 report.
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