Will ESMA’s crackdown end leveraged crypto trading in the EU?

Europe’s financial markets watchdog, ESMA, has taken a firm step that could reshape the continent’s crypto landscape, prompting urgent questions over the future of leveraged crypto trading in the European Union.

According to a statement released on February 24, firms must now follow existing EU rules on leverage limits, risk warnings, and investor protection, no matter what they name these products.

ESMA tells crypto exchanges to follow CFD rules for perpetual futures

The European Securities and Markets Authority has said these risky products promise high profit margins using leverage, but small retail investors who may not fully understand how they work often suffer the most losses.

Due to increased crypto trading using leverage, the European watchdog warned firms that calling these risky products “perpetual futures” or “perpetual contracts” won’t matter, as they look and behave like contracts for differences. 

According to the agency, changing names won’t help firms escape CDF regulation because the products let users trade with borrowed money and settle in cash.

And once a product qualifies as a CDF, a platform must set limits to stop traders from taking huge, risky positions and display clear risk warnings that explain how fast people can lose money. 

In addition, companies must close trades automatically when losses grow too large, offer negative balance protection, and remove all bonuses and rewards tied to the products.

Moreover, the regulator emphasized investor safety and awareness by requiring platforms to limit leveraged crypto products to a small group of experienced traders rather than advertising them to all users.

Meanwhile, firms must run checks on retail traders to confirm whether they understand the risks and to watch for conflicts of interest when designing products or trading venues.

ESMA expects full compliance and said any attempt to change product names or add small hidden features won’t work. 

Regulators tell crypto companies to use stricter rules as risky trading faces pressure

ESMA’s warning sparked a lot of reaction in the crypto industry. For example, Consensys’ Bill Hughes said regulators will step in and take over the entire process if firms don’t sit down, review their products, fix how they sell them, and clean up their internal systems.

Some crypto platforms have even blocked European customers rather than wait for regulators to act. Kraken, for instance, confirmed that their new perpetual futures linked to tokenized stocks and ETFs won’t be available to EU users at launch.

The trading experience for individuals within the EU may soon be quite different. There may be fewer high-leverage products to trade, and trading may be slower and more controlled. On the other hand, safety features can be strengthened to help users avoid large losses. 

However, there is a trade-off. While users may be safer, they may also be less likely to make quick, risky profits. So, crypto trading may be made safer, but perhaps not quite so exciting.

The European Securities and Markets Authority had already warned firms about risky crypto ads and financial influencers before. So, this is part of an overall trend. The idea is that crypto markets should be subject to the same general rules as traditional finance, especially to protect regular investors from complex and dangerous financial products.

The message from ESMA is hard to miss: Leveraged crypto trading must comply with the same rules as CFDs. Exchanges must adapt quickly, or they will lose access to EU retail customers. And for investors, the crackdown might mean a safer environment but fewer high-risk, high-reward opportunities.

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