The EU is enhancing crypto regulations but leaving the derivatives market unchecked, potentially endangering retail investors.
The European Union is ramping up its regulatory framework for unlicensed crypto exchanges as the transition period for the Markets in Crypto-Assets (MiCA) regulation approaches its end. However, the absence of oversight for the crypto derivatives market poses significant risks for investors, allowing exposure to high-risk offshore trading platforms.
Starting July 1, unauthorized crypto service providers will be required to halt operations, primarily focusing on spot trading. Notably, crypto derivatives, including perpetual futures, are not covered by MiCA regulations.
While regulators may argue that perpetual futures are benign under strict oversight, reality suggests otherwise, as these contracts account for about 80% of the total crypto trading volume. They allow traders to speculate on price movements using margin and leverage without owning the underlying asset, settling only the cash difference.
Patrick Gruhn, founder and CEO of Perpetuals.com, highlights the risks involved. In February, the European Securities and Markets Authority (ESMA) noted that products labeled as “perpetual futures” could fall under existing regulations governing contracts for difference (CFDs). Regardless of the product name, if it meets the CFD criteria, it must adhere to all relevant regulations, including leverage limits and mandatory risk disclosures, which can be burdensome for compliant providers in Europe.
Risks of Offshore Markets
European investors have easy access to platforms like Hyperliquid and Aster, which offer Bitcoin trading with leverage up to 50x and 200x, respectively. Neither platform is authorized under MiCA or the Markets in Financial Instruments Directive (MiFID), lacking enforcement mechanisms for loss limits and key information documents. This accessibility allows anyone with a self-custody wallet to engage in high-risk trading.
The absence of protective regulations often leads to substantial losses for retail investors. Historical data indicates that between 74% and 89% of retail accounts lost money on CFDs across the EU in 2018, with average losses ranging from €1,600 to €29,000. Similar trends are observed in the crypto perpetual futures market, where many retail accounts experience significant losses.
This situation creates a legal challenge within Europe. While MiCA prohibits third-country firms from serving EU clients unless initiated by the client, MiFID does not have a similar restriction, resulting in fragmented and ineffective third-country regulations.
ESMA advises European traders to thoroughly vet their service providers, noting that offshore brands lack protective measures. This caution is vital, particularly since leveraging increases risks compared to MiCA-compliant spot products.
There are concerns that retail traders may be worse off after MiCA’s transitional period ends. Transitioning from unregulated spot markets to unregulated high-leverage derivatives does not enhance safety; it merely shifts traders to riskier products.
This situation raises questions about both trader protection and competitive fairness. European firms must adhere to stringent regulations and invest heavily in compliance, while offshore platforms can operate with lower costs and less oversight, giving them an unfair advantage.
Jeffrey Sprecher, CEO of Intercontinental Exchange, noted that Hyperliquid is "bigger than NASDAQ" despite having a small team. The EU has demonstrated its ability to enforce rules on major exchanges; the critical question remains whether it will extend similar rigor to high-risk products that can jeopardize retail traders swiftly.
