The Full Guide to Cryptocurrency Broker Regulations in the EU

If you happen to offer crypto in the EU, you will need to know the full compliance details

When in the final quarter of 2017 brokers have flocked to offering cryptocurrency trading to their clients, the status of the cryptocurrency instruments in the EU was not included in the financial services framework. With the publication of the European Securities Markets Authority’s decision on March 28, that changed. CFDs on cryptocurrencies have officially been included as financial instruments in accordance with the law.

While trading of virtual currencies per se doesn’t constitute an activity that is subject to MiFID regulations, CFDs are a different story and brokers need to adhere to certain requirements to be able to provide such services to retail clients.

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The Basics

The European legal framework for financial services is not including cryptocurrency trading services into the financial instruments framework, so regulated brokers need to adhere to certain requirements when providing such instruments to clients. First and foremost, a requirement for brokers that have an EU license is that turnover in cryptos must not exceed 15 percent of the total turnover of the brokerage per quarter.

Passporting of financial regulations except for CFDs is not allowed. Brokers must inform their clients that the EU is not regulating crypto trading. Since the MiFID regulatory framework does not apply, brokers must display a specific risk warning. The warning dictates that crypto products are complex and high risk and clients can lose all of their invested capital.

Aside from that brokers must also include that virtual currencies values can widely fluctuate and may result in significant losses over a short period of time. Virtual currencies are not appropriate for all investors, and therefore, investors should not trade in such products if they don’t have the necessary knowledge and expertise in this specific product; they should always be fully aware and understand the specific characteristics and risks related to these products.

Back to CFDs

Since the central theme for regulated brokers is to offer CFDs, let’s focus on that issue. The instruments must comply with all of the directly applicable EU regulations including such from the ESMA and the EBA, the local regulators and any Q&As, Opinions and Convergence Tools published by the supranational European authority.

It is the view of CySEC and its peers that the risks associated with the underlying instrument in derivatives on virtual currencies are high. CIFs should consequently approach the provision of such services with caution, in the knowledge that close attention will be paid to all of their legal obligations.

Those include a number of policies such as best execution. The brokers must act honestly, fairly and professionally, in accordance with the best interests of their clients, provide fair clear and not misleading information to their clients, provide appropriate guidance on and warnings of the risks associated with investments in cryptos and have adequate product governance arrangements.

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The risk warning that we earlier mentioned is still valid but is also expanded for CFDs. It must state that the product is not appropriate for all investors. As such, customers should not engage in trading in relation to such products if they do not have the necessary knowledge in this specific product or if they cannot bear the loss of the entire invested amount.

Customers must be fully aware of and understand, the specific characteristics and risks in relation to these products and the fees and costs entailed. In particular, brokers must disclose and explain any rollover fees.

Brokers need to ensure that the reference prices used in relation to the underlying asset are gathered from publicly available sources with a good reputation and should perform a thorough evaluation before selecting pricing sources.

The companies must also evaluate and review their pricing sources, in order to ensure they adhere to best execution requirements. The brokers must also include the risks associated with their activities relating to Derivatives on Virtual Currencies when calculating their capital adequacy ratios.

Brokers are expected to maintain an adequate additional capital buffer of the highest quality of their capital (common equity tier 1 capital) in the context of their ICAAP, in order to enhance their resilience to financial shocks related to the crypto market. Last but not least, leverage on such instruments is limited to a maximum of 1:2.

If you are in Cyprus, CySEC Must Approve

In the case of the Cyprus Securities and Exchange Commission regulated brokers, they will have to apply with the regulator for a specific permit that grants them the right to offer cryptos. While there is no specific regulation that mandates all EU countries to do the same, local regulators might require the same.

Risks Associated with Some Crypto Brokers

A number of brokerages have allegedly been offering physical trading in cryptocurrencies without appropriately informing their clients about certain charges that apply. Namely, a number of former binary options technology providers have focused on the less savvy part of crypto enthusiasts to provide them with broking services that frequently include overnight charges of over 200% per annum.

Such products are not in any way regulated by EU financial regulators and EU authorities have been active in propagating retail investors to avoid dealing with unlicensed financial services providers. The problem in the case with cryptocurrencies is that the EU itself doesn’t yet have a secure regulatory framework that is governing such products. 

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