European regulator ESMA Ponders Curbs on Crypto Derivatives

ESMA seeks public feedback on cryptocurrency CFDs as it weighs restrictions.

Independent market watchdog European Securities and Markets Authority (ESMA) is seeking public input for drafting new rules on cryptocurrency derivative contract as it weighs restrictions. 

ESMA called for comments on contracts for differences (CFDs) on cryptocurrency to determine if those abide by the Markets in Financial Instruments Directive (MiFID).

CFDs sold across the EU are getting increased attention from regulators because investors “are exposed to a significant risk of loss.” CFD products are extremely complicated and retail investors have too little knowledge to understand the underlying risks.

The European regulator said in its document:

“In this context, ESMA is currently discussing whether CFDs on cryptocurrencies, whose underlying assets have displayed very high price variation, should be addressed in the measures and whether a 5:1 initial leverage would provide investors with sufficient protection. Alternatively, a lower leverage limit (2:1 or 1:1) or stricter measures (such as a prohibition on the marketing, distribution or sale of CFDs in cryptocurrencies to retail clients) could be considered.”

ESMA explained that capping the leverage limit at 5:1 would mean investors pay at least 20% of the initial total exposure of the CFD, while changing the leverage limit to 20:1 gives them better protection as they would only pay 5% of the total CFD value.

More importantly, ESMA wants to hear whether the public agree on the need to introduce rules about specific restrictions for CFDs in cryptocurrencies. The market watchdog said it would accept comments and suggestions until February 5, 2018.

In December last year, the UK Financial Conduct Authority (FCA) issued a warning to investors about cryptocurrency CFDs, describing the financial instrument as an “extremely high-risk, speculative investment.”

The FCA explained that cryptocurrency CFDs allow investors to speculate on a change in the price of any digital currency.

“A cryptocurrency is a virtual currency that is not issued or backed by a central bank or government. They have experienced significant price volatility in the past year which, in combination with leverage, places you at risk of suffering significant losses and potentially losing more than you have invested,” the UK financial regulator warned.