Cryptocurrency Derivatives Targeted By European Securities Regulator

Announcements, News, Regulation | January 19, 2018 By:

The European Securities and Markets Authority (ESMA) is considering possible restrictions on cryptocurrency derivatives as part of a broader crackdown on risky financial products.

ESMA announced the beginning of a consultation period to look into how cryptocurrency contracts for differences (CFD) would comply with their Markets in Financial Instruments Directive (MFID) regulatory framework. A cryptocurrency CFD is a tradable instrument that mirrors the movements of the asset underlying it. It allows for profits or losses to be realized when the underlying asset moves in relation to the position taken, but the actual underlying asset is never owned.

ESMA stated that the inherent risk and complexity of these products, distribution and sale through on-line channels, and the associated aggressive marketing techniques used by a number of firms, has led to significant investor protection concerns. Several national competent authorities (NCA) have also conducted an analysis or studies showing that between 74% and 89% of clients trading in these products lose money.

The regulator is looking for input on whether crypto CFDs should have strict restriction. The review period will conclude on February 5. It will include comments from industry players on the potential impact of the proposed measures.

“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,” the regulator said. “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.”

Some companies are offering leverage of up to 5:1. Leverage multiplies your losses and potential profits, and can have a significant impact on fees. It also places investors at risk of losing more than their initial investment, meaning they could end up owing money to the company.

ESMA is also considering a ban on the marketing, distribution or sale of binary options to retail clients.

“ESMA is currently minded to adopt this measure as the significant investor protection concerns relating to binary options are due to inherent features of the product that are unlikely to be sufficiently addressed through certain restrictions on the product,” ESMA said. “In particular, the pricing structure of the product means that, on average, investors will experience negative expected returns without providing any clear compensating benefits to retail investors (e.g. the hedging function served by vanilla options). The alternative option of a total ban that would include professional clients is not under consideration due to the lack of evidence of harm to this type of client.”