EU Markets Watchdog Renews Restrictions on Crypto-Based Derivatives

The European Securities and Markets Authority (ESMA) has recently revealed it has decided to renew its restrictions on the “marketing, distribution, or sale” of contracts for differences (CFDs) to retail investors, including CFDs based on cryptocurrencies.

A CFD is essentially a contract made between a buyer and seller that sees the parties exchange the difference between the opening and closing prices of a specific asset when it ends. They give investors exposure to the asset, without having to own it.

According to an official release, the move was approved by ESMA’s Board of Supervisors this week, and will come into effect on November 1. It’s set to last three months, and its goal is to protect investors.

ESMA’s restrictions first came into effect on August 1. Before these were imposed the leverage limit for crypto-based CFDs was of 5:1, but was then lowered to 2:1. This means a $10 investment by retail investors gives them a $20 exposure.

The regulator’s release reads:

ESMA considers that a significant investor protection concern related to the offer of CFDs to retail clients continues to exist. It has therefore agreed to renew the restriction from 1 November.

Earlier this year, the markets regulator issued a Call for evidence that claimed volatility in the price of most cryptocurrencies raised doubts as to whether investors were sufficiently protected. It has also issued a warning against initial coin offerings (ICOs), over the lack of investor protections in the fundraising practice, as well as its unregulated nature.

Per ESMA, unregulated cryptocurrency exchanges could also be a threat to investors, as they aren’t overseen by regulators who would presumably guarantee users’ protection against typical downfalls, including exit scams and thefts.

As for cryptocurrencies themselves, CryptoGlobe recently covered that European policymakers have revealed they won’t rush to regulate them. In a meeting in Vienna, Austria, they decided it was more prudent to wait for a thorough analysis made by European authorities. This after Bruegel, a Brussels-based think tank, called for EU-level regulations on the nascent industry while noting it should be scrutinized how exchanges operate and cryptoassets are distributed in ICOs.

In its release, ESMA also noted in some cases CFD providers weren’t able to use proper risk warnings over character limits imposed by third-party marketing providers. To tackle the problem, it agreed to introduce a reduced character risk warning that reads: “[insert percentage per provider] % of retail CFD accounts lose money.”