European investment firms must be transparent about the regulatory status of the products they offer their clients, including digital assets, the European Securities and Markets Authority (ESMA) has warned.
In a recent statement, ESMA said it has observed investment firms offering products that are beyond the regulatory scope of most European Union members. They include gold, real estate, some raw materials, and digital assets.
On digital assets, the watchdog noted that existing and upcoming regulations may not fully cover the industry. This includes the upcoming Markets in Crypto Assets (MiCA), the industry’s most advanced regulatory framework globally. Approved in April this year, it’s expected to become applicable in a month’s time but will only take effect in January 2025.
While MiCA is a major leap in overseeing the industry, “crypto assets offered by investment firms will continue to be unregulated in most jurisdictions…”
ESMA noted that unregulated products “such as cryptoassets or non-transferable securities may present a higher level of risk for clients.” Most clients may be under the illusion that they are afforded the same protections that investors in traditional assets get. When they lose their money and discover they can’t use legal routes to recoup it, they may blame the investment firms for not being clearer about the risk involved, the independent EU Authority says.
To prevent this, the watchdog advises that these firms must provide all the information on the risk of these unregulated products to their clients.
The European Union is leading the world in digital asset regulation with MiCA, a landmark framework the EU Parliament overwhelmingly voted in favor of in April. While some have criticized it for its one-size-fits-all approach to a novel technology in its infancy, it has received the support of the majority within the digital asset industry.
MiCA’s impact will be felt beyond the EU as it’s expected to shape regulatory approaches in the U.S., across Asia, and other parts of the world.
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