ESMA Proposes Strict Regulation of Crypto Leverage Products

The European Union's approach to regulating cryptocurrency markets has taken another significant step forward with the proposal by the European Securities and Markets Authority (ESMA) that leverage products be classified as Contracts for Difference (CFDs). This move would subject these products, including perpetual futures contracts linked to Bitcoin and Ethereum, to strict regulatory oversight.

Under the proposed framework, retail investors would face significant restrictions on borrowing to trade, with potential leverage limits of 2:1 or lower. In addition, trading platforms would be required to provide clear and prominent risk warnings about the high loss risks associated with these products. The rules also standardize procedures for forced margin liquidations, preventing negative account balances for retail clients.

ESMA's proposal is a logical extension of the EU's evolving approach to regulating crypto-assets, following the landmark Markets in Crypto-Assets (MiCA) regulation that provides a comprehensive rulebook for crypto-asset service providers and issuers. The proposed classification aims to harmonize the regulatory approach across EU member states, preventing regulatory arbitrage where firms might seek out jurisdictions with the most lenient rules.