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EU Markets Watchdog Toughens Rules on Crypto Derivatives

The European Securities and Markets Authority (ESMA) has toughened its stance on cryptocurrency derivative contracts.

In an announcement Tuesday, the EU markets watchdog said it has agreed to temporarily adjust the leverage limit for cryptocurrency-related “contracts for difference” (CFD) products to 2:1 – a move that will require retail investors to initially pay at least 50 percent of the total CFD value.

With a CFD, one party agrees to pay the other party if the value of the underlying asset changes.

The policy comes after the agency started a public consultation process in January, arguing at the time that the volatility of cryptocurrencies as an underlying asset for CFDs poses serious concerns for retail investor protection.

With initial leverage then standing at 5:1 – meaning investors could pay just 20 percent of the total CFD value initially – the agency had mulled either a lower leverage limit (2:1 or 1:1) or even banning distribution, marketing or sales of these products altogether.

In today’s announcement, the ESMA indicated that cryptocurrencies still remain an area of concern, and may consider tougher measures in the future in order to protect investors.

The regulator stated:

“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 new measure come at a time when the cryptocurrency market is seeing growing interest from retail investors, and brokers and dealers have responded to this demand with new products.

For instance, just this Monday, Swiss bank and securities dealer Dukascopy announced it is now offering bitcoin/US dollar CFDs through its retail client accounts, with future plans to offer purchase and sales of the underlying cryptocurrency assets.

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ESMA Seeks Public Input on Cryptocurrency Derivatives Policy

The European Securities and Markets Authority (ESMA) is seeking feedback on possible regulatory changes around a type of cryptocurrency derivative contract.

In a call for public input on contracts for differences (CFDs), ESMA says it is looking into how CFDs for cryptocurrencies would comply with their Markets in Financial Instruments Directive (MFID) regulatory framework, according to a release. Under a CFD, one party agrees to pay the other party if the value of the asset the contract is based on changes.

Specifically, ESMA is looking for input on whether cryptocurrency-based CFDs should have strict restrictions, noting in its statement:

“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.”

According to the document, a 5:1 initial leverage means an investor would only have to pay 20 percent of the CFD’s total value. The broker handling the investment, in that case, would then lend the investor the remaining balance for the CFD.

The document went on to note that a 2:1 or 1:1 limit might provide better protections for investors.

At the same time, the document noted, the safest course of action may be to bar retail clients from investing in CFDs entirely, and ESMA wants feedback on this potential option as well.

Last year, the U.K.’s Financial Conduct Authority warned investors who were considering crypto-based CFDs, calling them “extremely high-risk, speculative investments.”

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UK Finance Regulator Warns Against Cryptocurrency Derivatives

A U.K. finance regulator has warned consumers about a particular kind of derivative contract based on cryptocurrencies.

In a release on its website, the U.K. Financial Conduct Authority (FCA) cautioned would-be investors in cryptocurrency contracts-for-differences, or CFDs. Under a CFD, the two parties involved agree to pay either side in the event that the underlying value of an asset – in this case, an amount of cryptocurrency – changes over time.

These products allow users to speculate on the prices of different assets, and while cryptocurrencies fall under this umbrella, they ought to be considered very risky products, according to the agency.

CFDs fall under the purview of the FCA meaning that companies offering such products are within the agency’s jurisdiction. Legal safeguards aside, the agency warned that “these protections will not compensate you for any losses from trading.”

The agency said:

“Cryptocurrency CFDs are an extremely high-risk, speculative investment. You should be aware of the risks involved and fully consider whether investing in cryptocurrency CFDs is appropriate for you.”

The FCA listed price volatility, leverage, charges and funding costs, and price transparency as four risks to investing in crypto-based CFDs. The agency also noted that the initial fees required to invest in a crypto-based CFD are higher than for other contracts, and due to the volatility in cryptocurrency pricing, an investor could end up putting in more than the product they receive is worth.

Today’s release isn’t the first time the FCA has called for calm around investments related to cryptocurrencies. Back in June, FCA director of strategy and competition Chris Woolard said that “we do have to exercise a degree of caution.”

In September, the FCA said that initial coin offerings (ICOs) are “very risk” and advised would-be contributors to report any potential fraud they may encounter.

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