The European Union (EU) is taking a careful step towards including cryptocurrencies in its vast investment landscape. The European Securities and Markets Authority (ESMA), the financial regulator of the EU, is asking for expert opinions on potentially allowing Undertakings for Collective Investment in Transferable Securities (UCITS) to hold crypto assets.
If this move is approved, it could open up a massive €12 trillion market for cryptocurrencies. UCITS are highly regulated and trusted investment funds in Europe, including mutual funds, exchange-traded funds (ETFs), and money market funds. Their inclusion of crypto would represent a significant shift in the EU’s approach to digital assets, which has traditionally been characterized by stricter regulations compared to other regions.
The current proposal does not envision standalone UCITS funds dedicated solely to crypto. Instead, ESMA is exploring the possibility of allowing existing UCITS to allocate a small portion of their holdings, potentially 1-2%, to crypto assets. This measured approach reflects the EU’s focus on protecting investors while acknowledging the growing interest in cryptocurrencies.
The consultation period for industry stakeholders to provide feedback runs until August 7, 2024. This feedback will be crucial in shaping the final decision on crypto inclusion within UCITS.
ESMA’s Role in UCITS Regulation
ESMA’s move coincides with a broader shift in the global regulatory landscape towards crypto. The recent approval of spot Bitcoin ETFs in the US and Hong Kong signifies a growing comfort level with integrating cryptocurrencies into traditional investment vehicles. However, unlike these solely crypto-focused ETFs, UCITS would offer a diversified portfolio with crypto as a potential component.
Nicolas Streschinsky, Head of DeFi at Trilitech, a Tezos blockchain R&D hub, believes this inclusion could broaden the crypto investor base. “A small percentage of crypto assets within UCITS could attract investors seeking exposure to utility tokens used for transactions,” he highlights.
Adding a new type of investment like cryptocurrency also raises some questions. One important concern is the potential effect of MiCA, EU comprehensive cryptocurrency regulation currently under developed. ESMA is asking for feedback on how MiCA might impact the inclusion of specific cryptocurrencies within UCITS.
The EU’s exploration of allowing cryptocurrency in UCITS is a significant development. It shows a readiness to adapt to changing financial trends while still focusing on protecting investors. The next few months will be crucial as industry feedback helps guide the final decision, potentially opening the door to a €12 trillion market for cryptocurrency assets.
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