The European Union’s financial markets regulator, the European Securities and Markets Authority (ESMA), has released an investor protection statement warning investment firms to ensure clients are aware of the regulatory status of the products they offer, including cryptocurrency. ESMA is concerned about investment firms that offer unregulated products and services in the EU.
Regulatory Status of Crypto in the EU
Crypto is currently unregulated in the EU until the Markets in Crypto-Assets (MiCA) regulator is applied at the end of 2024. The European Council adopted MiCA earlier this month, which will require firms that want to issue, trade, and safeguard crypto assets, tokenized assets, and stablecoins in the 27-country bloc to obtain a license.
ESMA is worried that investment firms that offer both regulated and unregulated products and/or services risk confusing investors, who may misunderstand the protections they are afforded when investing in those unregulated products and/or services. Therefore, investment firms should “clearly disclose” to their clients when regulatory protections do not apply and should take measures to make sure that clients know the regulatory status of certain products, ESMA said.
The Best Interests of Clients
ESMA believes that, by virtue of their regulated status, investment firms offering unregulated products and/or services that may be considered as alternatives to investing in financial instruments should act in the best interests of their clients.
Last year, ESMA, along with other EU regulators, warned consumers about high risks behind cryptocurrencies. They said that crypto is not suited for most retail investors because they can lose all their money and be exposed to too-good-to-be-true returns. Furthermore, the regulators warned consumers that they should be aware of the lack of recourse or protection available to them, as crypto-assets and related products and services typically fall outside existing protection under current EU financial services rules.
ESMA believes that regulatory status should be clearly communicated at every stage of the sales process, including through marketing communications, and that information should not be misleading. Investment firms must take steps to ensure that clients are fully aware of the risks associated with investing in unregulated products and services, including cryptocurrencies.