On Thursday, May 25, the European Systemic Danger Board (ESRB) recommended EU authorities curb leverage trading in cryptocurrency. The move will assist maintain the sanctity of financial stability. This comes as an attempt to address the growing concerns over the dangers associated with digital currency trading.
In the previous few days, there has likewise been a growing interest in digital assets and their volatile nature. In doing so, it prompts regulatory authorities to prioritize investor protection.
In recent times, traders in the cryptocurrency industry have been exercising caution and steering away from leverage. Even so, BTC’s Estimated Leverage Ratio has slid from 0.195 to 0.239 in a 30 days. This signifies that more traders are enduring dangers by getting into high-leverage derivatives trading. This comes at a time when Bitcoin (BTC) is currently worth around $26,000.
The price comes after a trying 18 months for the industry, where we have seen Bitcoin (BTC) fall as much as 77%. In the same period, Luna collapsed, and FTX Trading Ltd dropped into bankruptcy.
“Systematic dangers could arise quickly and suddenly,” the ESRB stated in a report. “If the rapid growth trends observed in recent years were to continue, crypto-assets could pose dangers to financial stability.”
The ESRB has was known for stricter measures to manage the dangers of leveraged trading. Leveraged trading allows investors to amplify their exposure to digital assets, which can potentially likewise increase the capacity for substantial losses. The possibility of failure comes from the higher dangers associated with amplified market movements.
The EU regulator’s recommendation intends to safeguard investors and secure market stability.
The crypto- investment market has few links with traditional finance and the real economy. Still, given its exponential growth, there is a danger of contagion. Our report calls for close monitoring and identifies ways to better understand potential contagion channels pic.twitter.com/uZmhyBMTe7
— European Systemic Danger Board (@ESRBofficial) May 25, 2023
There is likewise the worry that inexperienced investors may not fully comprehend the dangers involved and could suffer severe financial losses.
The Recommendation Likely to Impact the Cryptocurrency Market and Traders
High leverage has been critical in cryptocurrency trading, attracting both professional traders and retail investors seeking substantial profits. As a result, the proposition to curb leverage in cryptocurrency trading could impact the market. If the recommendation is implemented, speculative enthusiasm may dampen and potentially stabilize the market.
By reducing leverage, investors could adjust their strategies and danger appetites, which could lead to decreasing trading volumes. In addition, with stricter regulations, digital currency exchanges and platforms may face increased scrutiny and must change what they offer users.
Calls for Worldwide Participation in Regulating Cryptocurrency Leverage
The EU regulator’s recommendation likewise prompts the need for worldwide participation in regulating digital currency leverage. The cryptocurrency market operates on a worldwide scale. As a result, when there are not enough regulations, there may be some level of inadequacy in investor protection.
This is why, having similar levels of regulation across jurisdictions would assist in creating a level playing field. In doing so, there would be consistent protection for traders across the borders.
EU watchdog calls for curbing leverage in cryptocurrency trading
— unfolded. (@cryptounfolded) May 25, 2023
The ESRB’s call for regulation speculates on stricter regulations, which can play a pivotal role in protecting investors, reducing excessive speculation, and enhancing some growth in the space. With ongoing considerations and potential implementation of the measures, we are is still to see some maturation and regulatory alignment in the digital currency industry.
Although while it may appear like these changes may attract about some short-term challenges, they may contribute to a more sustainable and secure cryptocurrency trading environment in the long run. The recommendations are not as of now binding. Nonetheless, they will likely inform the EU’s future work on a new version of its markets in cryptocurrency investment regulation (MiCA).
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