Cypriot regulator CySEC has issued a statement outlining that brokers have to cap the leverage on their cryptocurrency offerings at 1:5. The news comes as cryptocurrency volatility, in particular Bitcoin, increased materially in recent days.
The Cyprus Securities and Exchange Commission is outlining a set of rules when it comes to offering CFDs on cryptocurrencies. Most notably, brokers will need to cap their cryptocurrency turnover to 15 percent of total turnover on a quarterly basis.
Lack of EU Regulatory Framework on Crypto not an Impairment to Regulation
The CySEC outlines in its communique to Cypriot brokers that the European regulatory framework still hasn’t caught up, and is lacking a designated section governing cryptocurrencies. This is not stopping the regulator from establishing a strict framework when providing CFDs on cryptocurrencies.
Brokers regulated in Cyprus will need to apply the same requirements as they do with other financial products. The high risks associated with cryptocurrencies have been outlined in a separate communique.
A Slew of Requirements on Crypto CFDs
Brokers that are offering CFDs on cryptocurrencies will have to openly inform clients about a number of factors specific to the asset class. Cyprus Investment Firms will have to list that there is no regulatory framework governing cryptocurrencies.
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Higher risks will have to be specifically mentioned and high volatility will have to be specifically highlighted to be a prospective cause for significant losses. Investors that are trading cryptocurrencies will not be able to plead for compensation for losses through the Investor Compensation Fund.
Regulated Feed Providers and Best Execution Obligations
The CySEC orders brokers to observe certain requirements when offering the product. In addition to an appropriate monitoring of risks and their management and record keeping, brokers will need to use only feed providers such as exchanges and liquidity providers that are regulated in the jurisdiction where they are established.
All of the broker’s feed providers will have to be monitored and will need to adhere to due diligence procedures conducted by the CIF. Brokers are also mandated to use more than one feed that ensures accurate pricing of the asset and best execution through cross-checking of the rates. In case a CIF chooses to use only a single feed provider, it will have to find a way to keep a record on how best execution practices are adhered to.
The brokers will also have to clearly disclose to clients how bid and ask prices are calculated.
CIFs Not Permitted to Exercise Passporting Rights
Since there is no EU regulatory framework that governs cryptocurrencies, the CySEC says that the product is not covered by MiFID. As such the products will fall outside of the CIFs’ obligations under the law.
Last but not least, brokers are not allowed to exercise their passporting rights under the EU law. This point applies to countries within and outside of the EU. The companies will be fully responsible for assessing the status of the offering in every country where they are offering their services and must adhere to the local regulations.