3 - 5 minute read
Investment firms in the European Union that offer traditional finance (TradFi) products alongside cryptocurrencies could be putting their customers at risk, according to a statement released by the European Securities and Markets Authority (ESMA) on Thursday. The agency is concerned that consumers may be misled into believing they have access to regulatory protections and sound financial advice for their cryptocurrency investments.
ESMA is worried that some investment firms may use their regulatory approval for traditional finance products to promote their unregulated crypto offerings. While the Markets in Financial Instruments Directive (MiFID) rules ensure that investment intermediaries promote only appropriate financial products to clients, these regulations do not always apply to more exotic investment opportunities like cryptocurrencies.
The issue is set to be resolved by the EU’s Markets in Crypto Assets regulation (MiCA), which will bring MiFID-style rules to the sector, but the regime will only take effect in around 18 months. Until then, ESMA is urging investment firms to take all necessary measures to ensure that clients are fully aware of the regulatory status of the product or service they are receiving.
ESMA has previously warned about the risks associated with cryptocurrency investments. In March 2022, the agency cautioned consumers about the high risks associated with crypto assets. In October 2022, ESMA highlighted new threats such as hacks and consensus manipulation, and is set to consult on detailed secondary laws that will put MiCA into effect shortly.
The agency is also warning investment firms not to use regulatory approval as a promotional tool, as this can be misleading to consumers. ESMA recommends that investment firms take all necessary measures to ensure that clients are fully aware of the regulatory status of the product or service they are receiving, and clearly disclose to clients when regulatory protections do not apply.
Overall, traders should pay close attention to the regulatory status of investment products, particularly as the EU works to implement new regulations for cryptocurrency investments under MiCA. While investment firms may offer cryptocurrency investments alongside traditional finance products, traders should be aware that regulatory protections may not always apply. As ESMA notes, investment firms should take all necessary measures to ensure that clients are fully aware of the regulatory status of the product or service they are receiving.
The Bottom Line
ESMA’s latest warning highlights the need for traders to pay close attention to the regulatory status of investment products, particularly as the EU works to implement new regulations for cryptocurrency investments under MiCA. While investment firms may offer cryptocurrency investments alongside traditional finance products, traders should be aware that regulatory protections may not always apply. Investment firms should take all necessary measures to ensure that clients are fully aware of the regulatory status of the product or service they are receiving, and traders should do their due diligence before investing in any cryptocurrency product.
