coindesk.com
With the end of MiCA’s transitional period fast approaching, the European Union is finally cracking down on unlicensed crypto exchanges in an effort to purge the continent’s spot markets of rogue operators and protect European investors. But a dangerous loophole remains wide open that could whisk users away from regulated spot trading and into high-risk offshore derivatives platforms likely to wipe out their capital.
Regulators in the EU have set a July 1 deadline for unauthorized crypto asset service providers to wind down operations, but the enforcement crackdown only applies to spot trading. Crypto derivatives, including perpetual futures (also called “perps”), are not covered under MiCA’s jurisdiction.
That would be a defensible position for regulators to take if perps were a harmless product that was carefully policed by another authority. They’re neither. The majority of crypto trading volume — roughly 80% according to data from Glassnode — takes place in the crypto perpetual futures market. A crypto perpetual is effectively a contract of difference. Traders post margin and take leveraged directional exposure to a price they never actually own. The difference between those prices is then settled in cash.
Patrick Gruhn is founder and chief executive of Perpetuals.com.
ESMA itself said in a February statement that firms with derivatives marketed as “perpetual futures” are likely to fall under the existing product-intervention measures on contracts for difference (CFDs). The commercial name, ESMA said, is irrelevant. Even voluntary negative-balance protection does not alter the analysis. If a perp meets the CFD definition, all CFD rules apply: leverage limits, a mandatory risk warning, margin close-out, negative balance protection and a ban on trading incentives. Those restrictions are a heavy burden on licensed derivatives providers in Europe.
The offshore market is teeming with sharks
A European investor can open an account at Hyperliquid, the largest decentralized perp trading platform, and take Bitcoin exposure with 50x leverage. Other platforms, like Aster, offer up to 200x leverage on bitcoin. Neither platform is authorized under MiCA or the Markets in Financial Instruments Directive (MiFID), which covers derivatives trading in the EU. There’s no loss limit that the EU can enforce, no key information document, no bonus ban, and no close-out rule, and they’re available to anyone with a self-custody wallet and a few minutes of free time.
And without those protections, retail investors almost always lose: when ESMA and national regulators reviewed the data in 2018, 74% to 89% of retail investment accounts lose money on CFDs across EU jurisdictions, with average losses per client ranging from €1,600 to €29,000.