On Thursday, May 25, the European Systemic Danger Board (ESRB) recommended EU authorities curb leverage trading in cryptocurrency. The move willย assist maintain the sanctity of financial stability. This comes as an attemptย to address the growing concerns over theย dangers associated with digitalย currency trading.ย
Inย theย previous few days, there has likewise been a growing interest in digital assets and their volatile nature. Inย doingย so, it prompts regulatoryย authorities to prioritize investor protection.
In recent times, traders in the cryptocurrency industry have been exercising caution and steering away from leverage. Even so, BTCโs Estimated Leverage Ratio has slid from 0.195 to 0.239 in a 30ย days. This signifies that more traders are enduring dangers by getting into high-leverage derivatives trading. This comes at a time when Bitcoinย (BTC) is currentlyย worth around $26,000.
The price comesย after a trying 18 months for the industry, where we have seen Bitcoinย (BTC) fall as much as 77%. In the same period, Luna collapsed, and FTXย Tradingย Ltd dropped into bankruptcy.
โSystematic dangers could arise quickly and suddenly,โ the ESRB stated in a report. โIf the rapid growth trends observed in recent years were to continue, crypto-assets could pose dangers to financial stability.โ
The ESRB has wasย known for stricter measures to manage theย dangers of leveraged trading. Leveraged trading allows investors to amplify their exposure to digital assets, whichย canย potentially likewise increase theย capacity for substantial losses. The possibilityย of failure comes from the higher dangers associated with amplified market movements.
The EU regulatorโs recommendation intendsย to safeguard investors and secure market stability.ย
The crypto- investment market has few links with traditional finance and the real economy. Still, given its exponential growth, thereย is a danger of contagion. Our report calls for close monitoring and identifies ways to better understand potential contagion channels pic.twitter.com/uZmhyBMTe7
โ European Systemic Danger Board (@ESRBofficial) May 25, 2023
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Thereย is likewise the worry that inexperienced investors may not fully comprehend theย dangers involved and could suffer severe financial losses.
The Recommendation Likely to Impact the Cryptocurrencyย Market and Traders
High leverage has been critical in cryptocurrency trading, attracting both professional traders and retail investors seeking substantial profits. Asย aย 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. Inย addition, with stricter regulations, digitalย 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 regulatorโs recommendation likewise prompts the need for worldwide participation in regulating digitalย currency leverage. The cryptocurrencyย market operates on a worldwide scale. Asย aย result, when there are not enough regulations, there mayย be some level of inadequacy in investor protection.
Thisย isย why, having similar levels of regulation across jurisdictions would assist in creating a level playing field. Inย doingย so, there would be consistent protection for traders across the borders.
EU watchdog calls for curbing leverage in cryptocurrency trading
โ unfolded. (@cryptounfolded) May 25, 2023
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The ESRBโs 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 isย still to see some maturation and regulatory alignment in the digitalย currency industry.
Althoughย while it mayย 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 asย ofย now binding. Nonetheless, they will likely inform the EUโs future work on a new version of its markets in cryptocurrency investment regulation (MiCA).
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