Regulation
EU Considers Adding Cryptocurrencies into €12 Trillion Investment Market Bigger than Bitcoin ETFs – DL News
- The EU securities regulator is asking stakeholders whether it is appropriate to include cryptocurrencies in investment products.
- The framework of UCITS mutual investment funds is worth 12 trillion euros.
- The inclusion could be a game-changer for cryptocurrencies, experts say.
The European Union’s securities watchdog is asking stakeholders whether it should include crypto assets in investment products, a move that could allow cryptocurrencies to tap into a bigger market than Bitcoin exchange-traded funds.
The European Securities and Markets Authority is asking industry and experts to provide input on the expansion of assets eligible for the network, called Undertakings for Collective Investment in Transferable Securities or UCITS.
The move opens the door to broader access to cryptocurrencies via UCITS, a 12 trillion euros market.
If ESMA is convinced, it would be the “final step towards the integration of cryptocurrencies in Europe,” said financial regulation expert Sean Tuffy DL Newscalling it a potential “game changer.”
This comes on the heels of the approval of Bitcoin ETFs by US and Hong Kong regulators this year, highlighting how traditional financial players are getting involved in the cryptocurrency space.
In the US alone, funds managed by the likes of BlackRock and Grayscale have performed more or less $18 billion since January, becoming a key driver of Bitcoin’s rally in the first quarter of 2024.
However, approval is not a hopeless conclusion.
Expires August
ESMA’s call for stakeholder input is open until 7 August.
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“The impact would be more significant than that of US ETFs,” said Andrea Pantaleo, cryptocurrency regulatory and litigation lawyer at DLA Piper DL News.
“Because there could be many fund segments interested in investing small percentages of liquidity in crypto-assets.”
What is UCITS?
There are several reasons why access to UCITS could prove to be a boon for the sector.
UCITS investments are made up of many different categories of funds to which different assets are allocated depending on their risk and profile.
There is another way the EU framework could benefit cryptocurrencies: “Authorization is not required every time a fund invests in crypto-assets, and this would also benefit market liquidity,” Pantaleo said.
In the United States, ETFs are based on individual assets that regulators must authorize.
But in Europe, UCITS investment funds can allocate liquidity across multiple crypto assets without first obtaining permission for each of them.
“UCITS funds have specific investment limitations depending on the type of asset,” Pantaleo said. “We won’t have a 100% UCITS fund in cryptocurrencies, but we hope that many investment funds can hold 1-2% of their liquidity in cryptocurrencies.”
While investors can trade Bitcoin exchange-traded products in the EU, these have not been as popular as their US counterparts. Asset managers in the EU already offer ETPs that behave like ETFs.
Obstacles
But there is still a long way to go before crypto assets are potentially included in the picture.
“The only problem could be custody,” Pantaleo said, as regulation on custodian banks of funds should be coordinated with cryptocurrency custody.
Over the next few years, the EU bloc is introducing its own legal framework for cryptocurrencies, known as the Cryptocurrency Markets Regulation, or MiCA. For custodians, MiCA establishes asset separation rules and custodial policies.
Crypto assets involved in UCITS would likely have to comply with the same rules.
To this end, ESMA also asked for specific feedback on how the addition of specific cryptocurrencies to the framework would or would not be affected by MiCA.
“The process of updating the rules on eligible UCITS activities is not quick and will be subject to much negotiation,” Tuffy said.
“We have a long way to go before we know whether cryptocurrencies will be admitted into UCITS.”
Inbar Priess is a regulatory correspondent at DL News. Do you have advice? Email her at inbar@dlnews.com.