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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