EU Regulator Proposes to Curb Leverage in Crypto Trading Activities
The ESRB recommended restrictions on crypto firms’ lending to clients, especially for leveraged bets, and suggested higher collateral requirements for distributed finance products and stablecoins.
On Thursday, May 25, an EU watchdog – the European Systemic Risk Board – recommended that European authorities should curb leveraged bets on digital assets by introducing limits for investment funds and exchanges. Over the last few years, with the growing number of market participants, crypto trading is getting quite popular among retail investors. As a result of this, leveraged bets have been in high demand. The EU watchdog wants to prevent shocks in the crypto industry caused by leverage bets and prevent further jeopardy to financial stability.
The European Systemic Risk Board (ESRB) has made a few recommendations demanding regular reports from companies involved with the crypto sector along with introducing specific rules for some of the largest players in the space. In its report accessed by Reuters, the ESRB noted:
“Systemic risks could arise quickly and suddenly. If the rapid growth trends observed in recent years were to continue, crypto-assets could pose risks to financial stability.”
The development comes at a time when regulators across the world have been taking measures to protect investors’ interest in the crypto space. The last 18 months have been absolutely tumultuous for the crypto industry and marred with high-profile scams and bankruptcies.
During the crypto winter of 2022, the Bitcoin price tanked by more than 70% leaving investors dry of their money. Also, major incidents like the Terra ecosystem crash and the FTX exchange crash wiped out billions of dollars of investors’ money.
Making Tweaks to the MiCA Framework
Earlier this month, in a landmark decision, the EU passed the much-awaited Markets in Crypto Assets (MiCA) legislation. The MiCA has been adopted by EU member states and the European Parliament. Under the MiCA legislative framework, cryptocurrency businesses must get EU authorization to serve customers in the EU. They must comply with protections against money laundering and financing extremist organizations.
Thus, the ESRB has recently proposed a change in the recently passed EU regulation for “introducing leverage limits for investment funds exposed to crypto-assets”. These recommendations from ESRB are not bindings but a proposal to consider in the EU’s future work and new versions of MiCA.
The ESRB recommended restrictions on crypto firms’ lending to clients, especially for leveraged bets, and suggested higher collateral requirements for distributed finance products and stablecoins.
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Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.
