European Regulator Wants to Curb Leverage in Cryptocurrency Trading

The European Systemic Risk Board (ESRB) has issued a new regulatory guideline. By the decree of this new legislative document, cryptocurrency firms that are offering crypto lending services for their clients must impose higher collateral requirements on their clients.

It is important to note that in recent years, cryptocurrency lending services providers have popularized some innovative and effective ways of lending such as flash loans. On the other hand, crypto lending protocols also offer lending offers for consumers on easier terms.

The main reason that cryptocurrency lending protocols have made the process of leverage trading more effective than ever before is due to smart contracts and peer-to-peer options.

The new regulatory requirements issued by ESRB are directed towards leverage service providers such that they are asked to increase the required collateral limit for digital assets and stablecoins.

The authorities in Europe are advised to limit investment funds issued by the exchange platforms. During the last few years, leveraged trading positions have grown by many folds in the cryptocurrency trading arena.

The lawmakers hailing from ESRB have told the media that the step to increase the collateral percentage for the borrowers is for the greater good. They have told media that with the increased collateral requirements for new leverage positions the overall market volatility of the crypto market will calm down.

The officials claim that crypto markets may suffer from bouts of massive instability on account of sizeable leveraged positions. To this end, ESRB has also called for detailed reports from the financial enterprises that are associated with crypto lending services.

A new article published in Reuters suggests that the regulators are also planning to mandate these financial enterprises to add particular rules. ESRB officials have noted that there is a chance that the market changes happening in the crypto sector may bring about systemic risks that can hinder cumulative financial stability.

These regulations have arrived at a time when the global financial community and regulators are working on dealing with the looming financial crisis brewing in the TradeFi sector.

The financial uncertainty from traditional markets also impacted the growth in the crypto sector during the last 18 months when the flagship crypto price plunged by 70%.

EU Legislators to Add New Amendments to the MiCA

At the start of the ongoing month, regulators in the EU passed the Markets in Crypto Assets or MiCA framework. This legislative framework is considered one of the first comprehensive crypto regulations adopted by Parliament members and State members of the EU.

One noteworthy legislative requirement added to the MiCA is the necessity for local cryptocurrency enterprises to operate only after getting registration from the local EU regulators. It also means complying with the AML and other financial regulatory checks imposed by the regulators.

However, the guidelines on sharing the financial data of the consumers with the regulators are not widely discussed or talked about. Meanwhile, ESRB has included some new amendments in the leveraged requirements for leveraging crypto entities.

These amendments seek to restrict the size of investment funds allowed on leveraged cryptocurrency assets. The average crypto investor may benefit from the leveraged positions regulations but there is a need for a detailed examination of MiCA regulations for the benefit of the retail crypto investors.