European Union Markets Regulator Prolongs Crypto Derivatives Restriction

The European Securities and Markets Authority (ESMA) has chosen to extend restrictions it had imposed on contracts for differences (CFDs). This includes crypto-based contracts and essentially means crypto derivatives.

ESMA announced the three-month extension in a press release today, saying that it had been “carefully considered”.

A CFD is essentially a contract between two parties, through which the buyer bets on the direction of the market regarding a particular asset. The difference between the asset value at the time of writing the contract and its value at termination will be either compensated by, or recouped by the seller, depending on whether the buyer’s prediction was correct or incorrect.

The restrictions imposed by ESMA refer to the amount of capital a buyer must hold at purchase time: fixed by ESMA at 2:1, meaning that investors must hold at least half of the contract’s volume at the time of opening. Previously it was much less, at just 5:1.

These restrictions presumably come from fears over investor protection which ESMA has been concerned with in the past; market manipulation has been a worry for European authorities for some time. In January a Call For Evidence was issued which was seeking evidence of inappropriate behaviour in the CFD trading market. Findings raised concerns about investor protection regarding cryptocurrency CFDs, due to the market’s volatility and price variation. After consideration ESMA raised the leverage threshold from 5:1 to 2:1.

ESMA also recently stated that it will continue to monitor the risks associated with derivatives form cryptocurrencies:

“Due to the specific characteristics of cryptocurrencies as an asset class the market for financial instruments providing exposure to cryptocurrencies, such as CFDs, will be closely monitored, and ESMA will assess whether stricter measures are required.”

The alphabet soup of agencies across Europe seem to hold a similar view to ESMA. Numerous national authorities have expressed similar concerns about crypto CFDs including the French regulator AMF, and the Austrian FMA, which has proposed regulating CFDs across Europe in the same way gold trading is regulated. However, at present there remains no comprehensive rule book for the regulation of crypto in the EU and whilst there remains no European level regulation on cryptocurrency trading, national laws will continue to be applied within the bloc, potentially resulting in considerable variation from country to country. 

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