Official ESMA Release Gives Crypto-Based Contracts for Differences (CFD) Less Roadblocks
Official Release from ESMA Extends Crypto-Based Contracts for Differences (CFD)
A Contract for Differences (CFD) is a document between a buyer and a seller, outlining how the value of an asset differs from the value when the contract is signed. This type of document also lays out how the seller and buyer will compensate, based on that value. The European Securities and Markets Authority (ESMA) have tightened their restrictions on these types of contracts, especially in how they concern cryptocurrency.
The release from ESMA says that these restrictions were already implemented on August 1st, but it is scheduled for renewal on November 1st. To justify this decision, they stated that there was “significant investor protection concern,” in relation to the retail clients that take on CFDs.
Before the restrictions went into place, there was a leverage limit established for cryptocurrency CFDs, which was 5:1. However, since the new regulations went info effect, the limit has been restricted by over half, bringing it down to 2:1. Basically, any investor has to already be in possession of at least half of the volume that is outlined in the contract.
To prepare, the decisions made before the restrictions were implemented started in January. That month, there was a “call for evidence” issued by ESMA, which was considered (at the time) to be a potential threat to digital coin CFDs and their operation. In the call for evidence, the paper discussed how difficult it was for investors to be protected from the volatility of crypto prices.
In March, there were already strong requirements established for CFDs. At the time, ESMA said,
“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.”
Other regulators in Europe have also been incredibly cautious in how crypto investing plays out in their regions. In a report from CoinTelegraph, the European Supervisory Authorities (ESAs) said that every asset from crypto is “highly risky,” indicating “clear signs of a pricing bubble.”
Still, not every European country feels that way, as some countries in the EU are working on developing derivatives for cryptocurrency that will meet their needs. Stock market regulators in France are urging towards regulation under the current laws but are still stopping companies from advertising their platforms and tokens online. Austria has taken a different take, saying that supervision under the rules that the industry has for gold could be an effective solution. One watchdog in the UK is strengthening their rules against platforms, saying that each company has to get authorization before operating within the EU’s limits.