The European Union is intensifying its efforts to regulate unlicensed crypto exchanges as the transitional period for the MiCA framework draws to a close. However, a significant risk remains as the regulation does not encompass the crypto derivatives market, potentially exposing investors to high-risk offshore platforms.

As of July 1, unauthorized crypto asset service providers must cease operations, but this enforcement primarily targets spot trading. Notably, crypto derivatives, such as perpetual futures, fall outside the scope of MiCA.

Regulators might justify this exclusion if perpetual futures were benign products under stringent oversight. However, the reality is that approximately 80% of crypto trading volume occurs in the perpetual futures market. These contracts function as a difference contract where traders use margin and leverage to speculate on price movements without owning the underlying asset, with the cash difference being settled.

Patrick Gruhn is the founder and chief executive of Perpetuals.com.

In February, ESMA indicated that firms offering products labeled as “perpetual futures” are likely subject to existing regulations governing contracts for difference (CFDs). The name of the product does not matter; if it qualifies as a CFD, all associated rules apply, including leverage limits and mandatory risk warnings, which create a significant compliance burden for licensed providers in Europe.

Offshore Markets Present Significant Risks

European investors can easily access platforms like Hyperliquid, which allows Bitcoin trading with leverage of up to 50x, or Aster, offering up to 200x leverage. Neither of these platforms is authorized under MiCA or the Markets in Financial Instruments Directive (MiFID), meaning there are no enforcement mechanisms for loss limits, key information documents, or trading incentives, making them accessible to anyone with a self-custody wallet and a few minutes.

Without protective regulations, retail investors frequently incur losses; in 2018, data showed that 74% to 89% of retail accounts lost money on CFDs across the EU, with average losses ranging from €1,600 to €29,000.

My analysis of a broad dataset on crypto perpetual futures indicates that retail loss rates are similarly high, with many accounts losing significant capital. The same empirical basis for restricting CFDs applies to crypto perps, yet they continue to be marketed to European traders with much higher leverage than allowed for regulated products.

This creates a legal dilemma in Europe: while MiCA prohibits third-country firms from providing services to EU clients unless initiated by the client, MiFID lacks a comparable prohibition. Its third-country regulations are fragmented and largely ineffective.

ESMA warns European traders in crypto perps to verify their service providers and understand that offshore brands offer no protection. This caution is pertinent, especially since leverage poses greater risks compared to MiCA-compliant spot products.

There is a genuine concern that retail traders in Europe might be worse off after the end of MiCA’s transitional period. Transitioning traders from unregulated spot markets to unregulated, high-leverage derivatives platforms does not enhance their safety; it merely shifts them to riskier products.

This situation raises issues not only for trader protection but also for competitive fairness. European firms must comply with strict regulations and invest heavily in compliance and consumer protection, while offshore platforms can operate with lower costs and less oversight, gaining an unfair advantage.

Jeffrey Sprecher, the founder and CEO of Intercontinental Exchange (ICE), aptly remarked that Hyperliquid is "bigger than NASDAQ" with only a small team of "11 very smart people."

Europe has shown it can enforce rules on major exchanges; the pressing question now is whether it will apply the same rigor to the high-risk products that can devastate retail traders in an instant.

Note: The opinions expressed in this article are those of the author and do not necessarily reflect the views of CoinDesk, Inc. or its affiliates.