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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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‘Play Safe – Stay Far From Risks’ – EU Regulators Warn Crypto Investors

ESA or the European Supervisory Authorities have pointed out to customers to stay cautious when it comes to crypto investing as it has clear signs of high risk in a consumer warning pan-EU released on Mon Feb 12.

The Supervisory is made of – the European Banking Authority [EBA], the European Securities and Markets Authority [ESMA] and the European Insurance and Occupational Pensions Authority [EIOPA].

The warning goes to the extend as investing in cryptocurrency could conclude with losing a larg amount or even all.

“The ESAs warn consumers that VCs (virtual currencies) are highly risky and unregulated products and are unsuitable as investment, savings or retirement planning products.”

The warning, published on the ESMA website, comes with an introduction that explains the fear that too many people are investing in crypto without fully understanding the risks.

The official warning also brings up the idea that unregulated exchanges are unprotected because of their existence outside of global financial regulations, meaning a customer’s losses from an event like a cyberattack would not be covered by EU law.

“You should not invest money you cannot afford to lose.”

In the same manner, back in Nov 2017 – ESMA has released a similar warning towards ICOs [Initial Coin Offerings] highlighting out the same issues of unregulated activities and individuals not fully understanding the risk.

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EU Regulators Caution Consumers Against ‘Highly Risky’ Crypto Investing, Again

The European Supervisory Authorities (ESAs) has warned customers that cryptocurrencies are “highly risky” assets that show “clear signs of a pricing bubble” in a pan-European Union consumer warning released Monday, Feb. 12.

The ESAs is made up of the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA).

The high risk associated with investing in cryptocurrency, according to the ESAs, means that investors can “lose a large amount, or even all, of the money invested:”

“The ESAs warn consumers that VCs (virtual currencies) are highly risky and unregulated products and are unsuitable as investment, savings or retirement planning products.”

The warning, published on the ESMA website, comes with an introduction that explains the fear that too many people are investing in crypto without fully understanding the risks.

The official warning also brings up the idea that unregulated exchanges are unprotected because of their existence outside of global financial regulations, meaning a customer’s losses from an event like a cyberattack would not be covered by EU law.

The ESAs’s warning ends with advice for investors to protect themselves:

“You should not invest money you cannot afford to lose.”

ESMA had previously warned customers in Nov. 2017 about Initial Coin Offerings (ICOs), citing the same reasons of a lack of investor understanding and the problems with unregulated financial activities.

The ESAs’s most recent warning today comes after the European Central Bank (ECB) told CNBC on Feb. 7 that crypto regulation is “not high on the to-do list.” Conversely, on Feb. 8, an ECB Executive Board member referred to cryptocurrency a “contagion” and “contamination” and called for preemptive regulation.

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3 EU Watchdogs Warn Over 'High Risks' of Crypto Investment

Three European regulators with oversight over securities, banking and pensions issued a combined warning today to EU residents considering investing in cryptocurrencies.

Citing the crypto markets’ volatility, lack of regulation and the potential for severe losses, the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) wrote a brief note warning investors of the “high risks of buying and/or holding so-called virtual currencies.”

Collectively referred to as the European Supervisory Authorities (ESAs), the regulators state there is a “high risk” that investors will lose all of their funds if they choose to invest in cryptocurrencies, specifically noting that there is an apparent bubble in the markets currently.

They continued, writing:

“VCs [virtual currencies] and exchanges where consumers can trade are not regulated under EU law, which means that consumers buying VCs do not benefit from any protection associated with regulated financial services. For example, if a VC exchange goes out of business or consumers have their money stolen because their VC account is subject to a cyber-attack; there is no EU law that would cover their losses.”

The warning explicitly mentions bitcoin, ethereum, litecoin and XRP, while further noting that other cryptocurrencies are often sold without any information explaining their background or the risks in purchasing them.

Part of the risk, the ESAs claim, arises from difficulty purchasing or selling cryptocurrencies due to transaction delays. Users may purchase some amount of a cryptocurrency at a specific price, but network congestion means they could receive a smaller amount at a higher price, they say.

For residents who still want to invest in cryptocurrencies, the note recommends understanding the characteristics of the token being sold and not investing more than they can afford to lose. In addition, users should take steps to keep their digital wallets secure.

The warning comes amid increasing noise within the EU over the crypto market, its perceived risks and potential regulation.

The ESMA said last week that cryptocurrencies will be one of its top priorities in 2018, while, a day later, senior officials from France and Germany called for the G20 group of nations to discuss cooperative action on cryptocurrencies ahead of a summit next month.

At the same time, European Central Bank (ECB) executive board member Yves Mersch aired concerns over the apparent “gold rush” in the crypto markets, adding that a regulatory solution may be to force unregulated exchanges to report transactions.

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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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According to Key European Regulator, ICOs Could be Derivative Activities

Our London Correspondent Nick Ayton looks at the recent announcements coming out of The European Securities & Markets Authority (ESMA) and considers the immediate impact on the ICO community…

On the back of a series of statements, ESMA today issued one about ICOs, highlighting their concerns for investors that ICOs can cover fraudulent and illegal activities. ESMA further warned investors they can lose their money, and there are now big impacts for ICO platform providers. Also impacted are those agencies, partners and service providers that are involved in promoting, talking about and handling any ICOs activities.

The biggest impact will be for firms (ICO platform providers) that are central to issuing a token as part of the ICO process. It is a stark reminder of their inherent obligations to do things properly and follow the rules that are already in place.

“ESMA is concerned that firms involved in ICOs may conduct their activities without complying with relevant applicable EU legislation.”

It very much looks like ESMA is getting to grips with the direction of travel and how they intend to legislate Initial Coin Offerings now and in the future. The main concern of ESMA is protecting investors, which is a bit crass given the lack of investor protection leading up to and after 2008.

However like most regulation, most of it is bad and protects the few. Now you may be thinking this announcement will only apply to the EU member states. Yes, this is true, but it also brings most ICO activities into the regulatory tent – from a corporate, legal, investor or ICO provider perspective where one or more participants is a European or based here.

99.9% of tokens are securities

Given 99% of ‘tokens’ issued to date, regardless of the white papers’ disclaimers that deny all knowledge and claim their token isn’t a security, it is! Now this presents a big challenge to the ICO market as regulators look to tidy things up and bring a stop to the wild west behaviours seen in the early part of 2017.

If you have issued a token that is a security, the project, the ICO platform providers, the PR and marketing firms fall within and are expected to follow these guidelines.

ICO service providers now on the firing line

For ICO platform providers the implications are significant and the costs of being able to support current legislation will rise, exposing the directors and owners of these businesses to compliance requirements. There are many ICO platforms pumping the madness, and they take on any project regardless and have no consideration of the token being a security or whether the project makes sense, whether the founders are credible and there is some form of governance. The bottom line is we are better off without these platforms as they place naïve founders in the firing line.

Is this announcement part of the streamlining if the ICO market that will push out bad actors? If so, it has to a good thing right…?

Will we see ICO platform providers having to be regulated themselves? Inevitable or likely…

The key statement!

The key part of ESMA’s statement was:

“ESMA stresses that firms involved in ICOs should give careful consideration as to whether their activities constitute regulated activities. Any failure to comply with the applicable rules will constitute a breach.”

The key wording here is firms, as in:

  • ICO platform providers that issue tokens, take in deposits of crypto and hold it (have custody);

  • PR and marketing firms that pump and advertise tokens that are financial instruments (without licensing and the right declaration);

  • Board Advisors that evangelise about the project, pumping a security;

  • Community Managers that offer incentives to buyers of tokens that are securities.

Then we have the whole pre sale process that offers deep discounts to inside investors at the expense of the public…

The knock on effects will be far reaching…

ESMA clearly states…

“Where ICOs qualify as financial instruments, it is likely that firms involved in ICOs conduct regulated investment activities, in which case they (ICO platform providers)  need to comply with the relevant legislation, including for example: the Prospectus Directive, the Markets in Financial Instruments Directive (MiFID), the Alternative Investment Fund Managers Directive (AIFMD); and the Fourth Anti-Money Laundering Directive.”

AIFM vs MiFID

Most notably, ICO activities can also be linked to the Alternative Investment Fund Managers Directive, because the token is seen as a financial product and covered by MiFID that controls the advertising (pumping) and distribution of financial products. Therefore any ICO service provider that touches the ‘token,’ which is the financial instrument, has to fall in line.

Then there is the Prospectus Directive relating to proper projects’ correct disclosure and information for the investor to make an informed decision. Adequate information in the white paper with the likely additions of detailed ROI (returns) and revenue projects, governance around use of funds and the commitment for the founders to deliver on their promises and obligations will likely be required. When the white paper looks more like a prospectus, that it is when you have a token that is a security.

The debate rages…

When is a token not a security…?

It’s not a security when it is a currency, a reward for doing something on the platform, access to an ecosystem where tokens are earned like air miles. And that is about it.

Some tokens under eMoney rules allow more flexibility to be linked to a product or service and offer rewards for participation, such as a coupon or voucher that holds monetary value…

If the purpose of your token is to bring capital into your business, be under no illusions. In the US, UK and EU and in many other jurisdictions it will be considered a ‘polling instrument’ (comes under Collective Investment Scheme Rules) and therefore a ‘security’ because the capital will be used by the founders to build something…

Be safe…work with only the ICO providers that take things seriously, do the right things and have everything in place required to issue and promote a token that is a security.

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More ICO Warnings As EU Issues Two Regulatory Statements

European Union regulators have issued two further warnings on ICOs, directed at both investors and participating businesses.

Released Monday, the European Securities and Markets Authority (ESMA) followed multiple jurisdictions in raising concerns that ICOs may not conform to regulatory norms.

“ESMA has observed a rapid growth in ICOs globally and in Europe and is concerned that investors may be unaware of the high risks that they are taking when investing in ICOs,” a summary of the reports states.

“Additionally, ESMA is concerned that firms involved in ICOs may conduct their activities without complying with relevant applicable EU legislation.”

The “concerns” come as the ICO industry undergoes major changes. A far cry from the explosive growth seen just months previously, pressure from lawmakers has appeared to engender a slowdown in the number of token sales and amounts raised.

A shift to providing legislation-compliant exposure to cryptocurrency meanwhile is coming to the fore, with global FX market CME Group announcing its Bitcoin futures trading would likely go live by the middle of next month.

Correspondingly, ESMA takes the opportunity to “remind” firms involved in ICOs of their required adherence two four specific EU directives on anti-money laundering (AML).

“It is the duty of the firms themselves to consider the regulatory framework, seeking the necessary permissions and meeting the applicable requirements,” it added.

Regulators in countries including Canada and the UK have voiced similar worries about the need for securities compliance in recent months, while Chinese exchange BTCC’s CEO Bobby Lee has said he considers it unlikely China would reverse its ban on the practice in the near future.

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European Financial Regulator Warns Investors On ICO Risks

The European Securities and Markets Authority (ESMA) today issued two separate statements that outline what it perceives as the risks initial coin offerings (ICOs) pose for investors and startups, respectively.

Striking a concerned tone on the nascent state of the market, ESMA warned investors that the use of custom cryptocurrencies for fundraising comes with a “high risk” of capital loss. Adding to that, the authority alerted that ICOs may fall outside of EU laws and regulations, which in turn does not benefit investors.

According to a press release, the ESMA stated:

“ICOs are also vulnerable to the risk of fraud or money laundering.”

The markets watchdog’s second statement stressed that startups or open-source projects involved in ICOs are at risk of conducting regulated investment activities without observing applicable EU legislation, including its prospectus directive, the fourth anti-money laundering directive and other laws.

Firms involved in ICOs should give “careful consideration” to these activities, it warned, as failure to comply with EU rules would be considered a breach.

The news notably follows other recent ICO warnings including the Japanese FSA’s statement to investors on ICO risks, and another from Germany’s Federal Financial Supervisory Authority, which said: “Investors should be wary of the ‘numerous risks‘ involved in token sales.”

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The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at news@coindesk.com.