Category: Digital Transformation

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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The Prudential Regulation Authority (PRA) has announced a one-year delay in the UK implementation of Basel 3.1, moving the date to 1 January 2027. This decision, made in consultation with HM Treasury, reflects ongoing uncertainty about the United States’ timeline for adopting the reforms. Basel 3.1, a response to the 2008 financial crisis, seeks to improve banks’ risk measurement and standardize capital ratios across institutions. Despite the delay, the PRA remains committed to full implementation by 2030 and will adjust transitional periods accordingly.

Basel 3.1, reflected in the CRR3 framework, introduces significant changes to the calculation of capital requirements for all risk types, aiming to reduce variability and improve consistency across banks. Key reforms include the introduction of a 72.5% capital floor for IRB models, stricter limits on Advanced-IRB usage, and a more detailed standardized approach for credit and operational risk. The framework also recalibrates the leverage ratio, introduces a buffer for global systemically important banks (G-SIBs), and replaces advanced operational risk measurement approaches with a single standardized method to ensure industry-wide consistency. LPA is your prime RegTech supplier, providing innovative solutions for financial institutions and asset managers to meet complex regulatory requirements efficiently.

The European Securities and Markets Authority (ESMA) has issued draft regulatory technical standards (RTS) under the updated Alternative Investment Fund Managers Directive (AIFMD II) to govern open-ended loan-originating alternative investment funds (AIFs). These proposals aim to ensure robust liquidity management by requiring fund managers to align liquidity risk management systems with the funds’ investment strategies and redemption policies.

Key measures include defining suitable redemption policies, maintaining adequate liquid assets to meet investor demands, and conducting quarterly liquidity stress tests. Managers must also implement systems to monitor liquidity risks continuously, considering factors such as portfolio diversification, credit quality, and investor behaviors. The RTS emphasize the importance of carefully calibrated liquidity management tools and stress scenarios to address market pressures.

These proposals reflect ESMA’s commitment to enhancing market stability and investor protection by promoting transparency and resilience in the operations of loan-originating AIFs.

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The Council of the European Union has reached an agreement on a proposed Financial Data Access (FIDA) framework, designed to create a standardized system for sharing customer data among financial institutions and service providers. This initiative is a key step in modernizing the EU’s financial sector, fostering innovation, improving competitiveness, and giving consumers more control over their data concerning financial information. The framework will apply to diverse financial data, including mortgages, loans, investments, insurance products, pensions, and crypto-assets.

Under the proposed rules, financial institutions will be required to provide secure and standardized access to customer data upon request, ensuring transparency while respecting trade secrets and intellectual property. Consumers will gain access to dashboards enabling them to manage their data permissions in real-time, including granting, withdrawing, and monitoring access. To balance responsibilities, financial institutions may receive compensation for making data available under certain conditions.

With the Council’s agreement, negotiations with the European Parliament will now proceed to finalize the legislative text. Once adopted, the regulation will be published in the EU’s Official Journal and come into effect across the member states two years after publishing it with Regulatory Technical Standards (RTS) to be developed. This move represents a critical step in adapting the EU’s financial sector to the digital age while safeguarding consumer rights and encouraging market innovation.

The European Banking Authority (EBA) has explored the potential advantages and challenges of tokenised deposits, emphasizing the impact of distributed ledger technology (DLT). Tokenised deposits could enhance programmability and efficiency, enabling automation of transactions via smart contracts, which reduces costs, improves speed, and supports complex settlements. These features, however, depend on specific design choices and use cases.

DLT-based systems also have the potential to bolster anti-money laundering (AML) compliance by improving transparency, traceability, and security. Transactions recorded on immutable ledgers can facilitate real-time monitoring and automated compliance processes, although challenges like private key theft and operational vulnerabilities persist.

Consumer protection remains a key concern. Widespread adoption may be hindered by low levels of financial literacy, lack of access to digital tools, and risks of exclusion. Effective disclosures and education will be crucial to mitigate confusion among consumers.

On the regulatory side, distinguishing tokenised deposits from similar instruments like e-money tokens (EMTs) poses classification challenges. The regulatory frameworks for deposits and EMTs differ significantly in terms of rights, protections, and eligibility for deposit insurance.

Additionally, operational risks such as dependency on third-party DLT providers and potential liquidity management challenges highlight the need for robust safeguards. The programmability of tokenised deposits could affect bank liquidity and systemic stability, requiring careful monitoring and empirical analysis as adoption grows.

The EBA’s findings underscore the transformative potential of tokenised deposits while stressing the importance of managing associated risks to ensure consumer confidence and financial stability.

The European Securities and Markets Authority (ESMA) has released its Final Report on Guidelines for Templates and Standardized Tests related to the classification of crypto-assets under Article 97(1) of Regulation (EU) 2023/1114. These guidelines aim to provide harmonized templates for explanations and legal opinions, ensuring consistency in regulatory classification under the Markets in Crypto-Assets Regulation (MiCAR).

The templates address the requirements under Article 8(4), mandating detailed explanations for why a crypto-asset should not be considered an e-money token (EMT), asset-referenced token (ART), or a crypto-asset excluded from MiCAR. Similarly, under Article 17(1), issuers of ARTs—particularly credit institutions—are required to submit legal opinions validating that their assets meet the regulatory criteria for classification.

ESMA’s move comes in response to challenges faced by competent authorities in reviewing the classification of crypto-assets due to inconsistent or insufficient information. Without standardized templates, authorities across Member States risk regulatory arbitrage, inconsistencies in application, and potential lapses in compliance.

The guidelines introduce a standardized test to harmonize how crypto-assets are assessed under MiCAR. This test seeks to clarify whether a crypto-asset falls within the scope of Titles II, III, or IV of MiCAR, streamlining the classification process. ESMA also emphasized the importance of balancing harmonization with flexibility, acknowledging that national interpretations of related financial products may differ.

By implementing these measures, ESMA aims to ensure that competent authorities receive sufficiently detailed and consistent information. This will strengthen the regulatory framework, reduce disparities between Member States, and mitigate the risks of regulatory arbitrage. The publication of these guidelines marks a significant step towards a unified approach to crypto-asset regulation in the EU, providing clarity for issuers and enhancing market stability.