EU Watchdog Proposes Limiting Leverage in Crypto Trading

The European Systemic Risk Board (ESRB), the European Union’s (EU) financial watchdog, asked lawmakers to limit leverage in crypto trading to mitigate risk and ensure financial stability. The regulator’s recommendations are not binding, though they can guide future changes to the markets in crypto assets regulation (MiCA) legislation.

EU Financial Regulator Calls for Limitations on Crypto Firms’ Ability to Lend Tokens

EU’s financial watchdog urged the bloc’s lawmakers to restrict the use of leverage in crypto trading by imposing limits on investment funds, digital asset exchanges, and other crypto-related institutions to protect financial stability.

Aside from that, the ESRB put forward several other suggestions aimed at regulating the nascent space, from requesting regular reports from all companies managing crypto assets to establishing specific regulations for the largest players in the industry. The recommendations come after a severe crypto market downturn, as several collapses of high-profile firms, coupled with harsh macroeconomic conditions, sent crypto prices to multi-year lows.

“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 ESRB said in the report.

The ESRB focused on curbing the use of leverage, particularly calling for restrictions on digital asset firms’ ability to lend cryptocurrencies to their users. In addition, the watchdog also demanded higher collateral requirements for distributed financial instruments and stablecoins.

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ESRB’s Recommendations to Inform Future MiCA Versions

While the ESRB’s latest suggestions are not binding, they will likely inform the EU’s future efforts on new renditions of the bloc’s recently-approved MiCA.

Adopted earlier this month by the European Council, MiCA is the EU’s most comprehensive set of crypto regulations to bridge the bloc’s existing financial services legislation gaps. The council’s green light came after the regulation was approved by the European Parliament in April, bringing it closer to becoming a law.

MiCA was first introduced by the European Commission in 2020 as part of a broader digital finance package established to advance technological development in the region while also putting in place certain safeguards to ensure consumer protection. The EU reached a policy agreement on MiCA in October 2022, a month before the devastating FTX collapse.

The legislation was welcomed by many in the crypto community who believe that a unified EU-wide framework will make the bloc more attractive to crypto companies and put pressure on other global jurisdictions to develop similar regulatory frameworks.

Do you agree with ESRB’s views that using leverage in crypto trading should be more limited? Let us know in the comments below.