European Securities And Markets Authority Renews Ban On Crypto Derivatives For Retail Investors

The European Securities and Markets Authority (ESMA) has announced that it has extended its ban on crypto derivative products such as Contracts for Differences (CFDs) for retail investors specifically.

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The European Securities and Markets Authority (ESMA) has announced that it has extended its ban on crypto derivative products such as Contracts for Differences (CFDs) for retail investors specifically.

The commission cited “significant investor protection concern[s]” as the main reason for extending the trading restriction for another 3 months.

European Securities And Markets Authority Renews Ban On Crypto Derivatives For Retail InvestorsTemporary extension approved for three months

The decision also covers those contracts based on cryptocurrencies, the regulator revealed in a publication on its website on September 28.

CFDs are contracts that buyers and sellers sign, stipulating that the difference between an asset’s current value and its value at the time of the contract has to be compensated for, with the seller paying the difference when it is positive, and the buyer paying if it is negative.

According to the regulator’s publication, the extension prolongs the restrictions by a further three months, meaning that the restrictions that were to end November 1 will now extend into 2019 to give ESMA more time to deliberate on a more permanent solution.

ESMA has explained the need for the extension, pointing to the many concerns about the CFD environment in relation to retail clients as its main reason for continuing to enforce investor protections.

The EU regulatory body had, earlier in the year, revised the requirements related to derivates. It implies that cryptocurrency investors are obligated to hold half the volume of what their contract stipulates.

ESMA seeks to protect investors

In January, ESMA published what it called a “call to action” notice that sought to find potential intervention measures to possible cases of interference in crypto CFDs.

As part of its concerns, the agency pointed out the issue of high cryptocurrency price volatility, expressing doubts about sufficient investor protections.

In March, the securities watchdog introduced stringent requirements for contracts for differences. At the time, it said that the crypto asset class had specific characteristics that necessitated increased client protection.

It thus was an obligation of the agency to closely monitor any financial instruments seeking to provide exposure to cryptocurrencies like CFDs adding that it would assess whether there was a need to introduce stricter measures.

According to the report, the leverage limits of a position vary depending on the volatility of the underlying asset. The limits range from 30:1 for the least volatile to 2:1 for the most volatile assets.

Before the new restrictions came into effect on August 1, crypto CFDs had a leverage limit that was fixed at 5:1. However, that ratio has since been set at 2:1 as crypto is very volatile.

ESMA’s approach to crypto regulation has been replicated by many other EU regulators, all repeatedly urging caution when it comes to investing in crypto.

The European Supervisory Authorities (ESAs) came out forcefully in February and released a notice warning the public about the high risk associated with cryptocurrencies, stating that customers should be wary of digital currencies, which have shown clear signs of a price bubble.

Individual EU nations have adopted similar views, with many focused on how to best deal with the topic of cryptocurrency derivatives. All, however, seem to agree that caution should guide every investor.

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