The European Securities and Markets Authority (ESMA) is expressing concerns over the potential misrepresentation of risk in the crypto investment sector by EU-based firms offering digital assets alongside traditional financial instruments.
According to the EU regulatory agency, these firms could be leveraging their regulatory approval for offering traditional financial stocks or funds to give clients a false assurance of sound financial advice or compensation mechanisms in case of any mishaps with their crypto investments.
The agency draws attention to the fact that while the Markets in Financial Instruments Directive (MiFID) in the EU ensures that only appropriate financial products are promoted to clients by investment intermediaries, it does not extend to more unconventional investment opportunities like precious metals, real estate, or non-transferable loans.
There are plans to establish MiFID-style regulations for the crypto sector through the EU’s Markets in Crypto Assets regulation (MiCA).
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However, the implementation of this regime is projected to take around a year and a half.
ESMA, headquartered in Paris and coordinating with national regulators, has expressed concerns over some firms exploiting this regulatory gray area during the interim period.
"ESMA encourages investment firms to take necessary steps to ensure that clients are fully cognizant of the regulatory status of the products or services they are availing and to explicitly inform clients when regulatory protections are not applicable," ESMA stated, stressing that regulatory approvals should not be used as a marketing gimmick.
ESMA had earlier issued warnings about the potential risks of crypto investments, highlighting new threats like cyber-attacks and consensus manipulation, in an October report.
The agency is also poised to hold consultations on comprehensive secondary laws that would actualize the MiCA regulations.
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