- The ESMA published a public statement alerting investors about the dangers when investing companies sell regulated and unregulated products.
- Investing in EU businesses that provide cryptocurrency alongside more conventional goods may be deceiving their customers.
- ESMA recommends that investment firms consider in terms of risk management systems and policies.
The European Securities and Markets Authority (ESMA) issued a public warning to investors about the dangers that occur when investment businesses provide both regulated and unregulated goods and/or services.
According to the statement, retail investors often depend only on investment businesses’ reputations, making it easier for them to miss the potential hazards of unregulated goods and/or services supplied by investment firms. This is particularly true when the unregulated product serves a comparable function as a MiFID II-regulated financial instrument (investment or hedging).
As a result, ESMA’s statement is intended to remind companies of the actions they should take in such circumstances (e.g., disclosure with appropriate documentation) so that investors are fully aware of the unregulated status of these products and services and the fact that they may not be able to benefit from the regulatory protections that apply to investing in regulated products.
Moreover, ESMA suggests that investment companies assess the influence of their unregulated operations on the firm’s total business activities when developing risk management systems and procedures.
The EU’s Markets in Crypto Assets Regulation (MiCA) is scheduled to introduce MiFID-style standards to the industry, but it will not go into force for another 18 months. However, ESMA, a Paris-based institution that brings together and coordinates national regulators, is concerned that certain businesses are promoting and abusing ambiguity.
“In addition, ESMA recommends investment firms take into consideration the impact that their unregulated activities may have o their business activity as a whole as part of their risk management systems and policies,” the statement said.
ESMA has already warned that cryptocurrency is problematic, and an October study highlighted fresh concerns like hacking and consensus manipulation. The agency will also hold a consultation soon on the exact secondary legislation that will bring MiCA into action.
As Coincu reported, ESMA also issued criteria to prepare market participants to operate in a tokenized securities sandbox. ESMA worked with eleven financial companies, trading venues, and central securities depositories to draft the guidelines. Although they are not mandatory, participants are strongly urged to follow them.
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