EU regulator warns of DeFi risks, pushes back against 'code as law'
The European Securities and Markets Authority published a report outlining multiple risks to investors and financial stability stemming from decentralized finance. "Although investors' exposure to DeFi remains small overall, there are serious risks to investor protection, due to the highly speculative nature of many DeFi arrangements, important operational and security vulnerabilities, and the lack of a clearly identified responsible party," the report said.
The independent EU authority warned that DeFi operates in the absence of trusted intermediaries, which "could otherwise mitigate risks pertaining to financial stability and investor protection." The report, published Wednesday, highlighted the regulator's primary concerns regarding DeFi innovations. It separated smart contracts into five categories to help regulators understand the "enormous technological complexity of these systems." "Smart contracts remain an unregulated phenomenon where the accepted principle is exemplified by the notion that 'code is law,'" the regulator asserted. It said adherence to this principle creates a tendency to accept smart contract outcomes, "regardless of any moral or legal consideration."
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