CySEC Cryptocurrency CFD requirements update

Cypriot financial regulator has issued CySEC Cryptocurrency CFD requirements update following the warning for investors about the risks associated with trading on virtual currencies.

16 October, AtoZForex – The key regulator of the Cyprus financial market, the Cyprus Securities and Exchange Commission (CySEC) warned the investors’ community regarding risks associated when trading virtual currencies. More specifically, the Cypriot regulator has cautioned that trading on virtual currencies or on contracts for difference (CFDs) relating to virtual currencies is not suitable for all investors.

CySEC Cryptocurrency warning

The Cypriot watchdog states that these products are complex. Thus, investors need to make sure that they are fully aware of the specific characteristics and risks in regards to the trading on virtual currencies or cryptocurrency CFDs. This includes the risks of the venues on which such cryptocurrencies might be traded on.

Moreover, the CySEC warns that there are no specific EU regulatory frameworks that would protect investors who trade on virtual currencies. Following on this, the Cypriot supervisor stated that trading on such products comes with a high risk of losing the invested capital.

Also, the trading prices of cryptocurrencies and cryptocurrency CFDs can fluctuate. They can also become temporarily or permanently unavailable, according to the regulator. Thus, investors should trade carefully. It is recommended to trade only with funds you can afford to lose.

In addition, the CySEC has outlined specific practices that can signal potential warning signs:

  • “Guaranteed” high investment returns, with little or no risk.
  • Unsolicited offers (without providing full analysis of the risks involved).
  • Sounds too good to be true, as investments providing higher returns typically involve more (high) risks.
  • Sales practices characterized by direct or indirect pressure or promises to actual or potential investors to trade in such products).

CySEC Cryptocurrency CFD requirements update

In relation to the CySEC warning on cryptocurrency trading, the regulator has set the specific requirements that may apply for CIFs when providing services on virtual currencies or cryptocurrency CFDs.

CySEC reiterates the lack of regulation in regards to the trading on virtual currencies or trading cryptocurrency CFDs. CySEC also adds:

“There is no official position from European authorities/bodies determining whether the trading on CFDs relating to virtual currencies falls under paragraph 9, Section C, Annex 1 of Directive 2004/39/EU on markets in financial instruments (‘MiFID’). “

Furthermore, the CySEC has outlined the requirements for CIFs that intend to carry out services related to such products. Below we discuss some of the rules outlined by CySEC:

  1. CIFs must ensure that all risk associated with this activity are identified, measured and properly recorded. They must ensure that such risks are managed, monitored and eliminated.
  2. CIFs must only use feed providers (e.g. virtual currency exchanges, liquidity providers) that are licensed/regulated in the jurisdiction that are established.
  3. CIFs must ensure that their counterparties/feed providers agree to periodic and regular due diligence checks by the CIF.
  4. Firms should use more than one feed provider and should cross-check with other feed providers in order to ensure that best execution principles are followed. Where only a single feed provider is used, CIFs must be able to determine and record how their best execution obligations are held.
  5. CIFs must clearly disclose to the public the methodology used to calculate the bid and ask prices.
  6. For all retail clients, the leverage limit should be set 5:1 for trading on CFDs relating to virtual currencies.

If you intend to read the whole official document by CySEC, please find it here.

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