EU Explores Potential Game-Changer: Including Crypto in 12 Trillion Euro Investment Market

The European Union’s securities watchdog, the European Securities and Markets Authority (ESMA), is exploring the possibility of adding crypto assets to the 12 trillion euro ($12.8 trillion) Undertakings for Collective Investment in Transferable Securities (UCITS) investment product market.

This move could potentially open the door for broader access to cryptocurrencies through one of the largest mainstream investment vehicles in Europe.

TLDR

• The European Securities and Markets Authority (ESMA) is seeking expert opinions on whether to add crypto assets to the 12 trillion euro ($12.8 trillion) Undertakings for Collective Investment in Transferable Securities (UCITS) investment product market.
• If approved, UCITS funds would become one of the largest mainstream funds with crypto exposure, potentially enabling broader access to cryptocurrencies and serving as a catalyst for broadening the holder base of utility tokens.
• The current EU regulatory framework does not specifically address digital assets, and the inclusion of crypto in UCITS could imply that digital assets would be regulated as securities in the EU.
• The consultation process, open until Aug. 7, aims to gather feedback from stakeholders on how to adapt the UCITS framework to include digital assets while ensuring investor protection and market stability.
• The move comes amid the approval of spot Bitcoin ETFs in the US and Hong Kong, highlighting the growing interest of traditional financial players in the crypto market.

UCITS funds are known for their high level of investor protection and are a popular choice among retail and institutional investors across Europe and globally.

These funds typically revolve around securities and are divided into numerous fund types, each with a particular asset allocation based on the fund’s risk profile.

The inclusion of crypto assets in UCITS could imply that digital assets would be regulated as securities in the EU, although the watchdog has yet to clarify its stance on the matter.

The current EU regulatory framework, implemented through the UCITS Eligible Assets Directive in 2007, defines the criteria for assets that UCITS can invest in, with the aim of ensuring liquidity and risk diversification.

However, the rise of digital assets like cryptocurrencies has presented new challenges and opportunities that the existing directives do not specifically address.

The high volatility and emerging market trends associated with digital assets pose unique risks and potential rewards for investors that need to be regulated appropriately.

In response to a request from the European Commission (EC) to ensure that UCITS rules keep pace with rapid market developments, ESMA has initiated a review of the rules governing crypto asset investments by UCITS.

The agency is particularly interested in understanding the implications of allowing UCITS to invest in crypto, both in terms of investor protection and market stability.

The consultation process, which is open until Aug. 7, seeks input from stakeholders on how to adapt the UCITS framework to include digital assets, focusing on direct and indirect exposures.

Investment firms, consumer advocacy groups, and other financial entities are encouraged to provide feedback, which ESMA will consider in preparing its technical advice to the Commission.

If approved, the inclusion of crypto assets in UCITS could be a game-changer for the industry. According to Nicolas Streschinsky, the Head of DeFi at Trilitech, a Tezos blockchain R&D and Entrepreneur Hub,

“The inclusion of a — likely small — percentage of crypto assets in some UCITS funds could be another catalyst in broadening the holder base of cryptocurrency assets, specifically utility tokens used to pay transaction fees on major blockchains.”

The potential impact of this move is significant, as it could enable broader access to cryptocurrencies via a market that is larger than the recently approved spot Bitcoin ETFs in the US and Hong Kong.

Andrea Pantaleo, a lawyer specialised in crypto regulation and litigation at DLA Piper, noted that “Authorisation is not required for each time a fund invests in crypto-assets, and this would also benefit market liquidity.”

However, there are still obstacles to overcome before crypto assets can be included in the UCITS framework.

Pantaleo pointed out that the regulation on depository banks for funds should be coordinated with crypto-asset custody, and the EU’s upcoming legal framework for crypto, known as the Markets in Crypto-Assets regulation (MiCA), will likely influence how these assets are regulated within UCITS.