The European Union risks falling behind on key efforts to regulate cryptocurrencies because its securities watchdog lacks the resources to evaluate their potential impact on financial markets quickly enough.
The European Securities and Markets Authority won’t make an Oct. 31 deadline for recommending whether a common type of fund should be permitted to hold assets like crypto, Chair Verena Ross said. It also faces a decision on whether to stagger implementation work on a sweeping digital-asset legislation the EU approved last year, she said.
“Resources is an issue for ESMA generally because we have had a large number of additional responsibilities and mandates given to us over the last few years, and not always necessarily with a lot of additional resources,” Ross said in a recent interview. “That has certainly created some challenges for us.”
ESMA’s constraints raises the specter of the bloc falling behind jurisdictions like the U.S., where Bitcoin exchange-traded funds have raked in more than US$11 billion in net inflows since they were approved in January. Already there are differences in how some crypto rules are implemented among EU countries, creating confusion among companies and investors.
The European Commission asked ESMA in June to review a possible expansion of the Eligible Assets Directive, which dictates what type of asset classes funds listed in the bloc can hold directly and indirectly, by Oct. 31. That includes investigating whether Ucits funds have been investing in areas like commodities, leveraged loans and cryptoassets, and whether that poses additional risks to retail investors.
The regulator is now more likely to report its findings toward year-end or the start of 2025, Ross said.
Ucits-compliant funds in Europe, which are EU-regulated collective investment funds that can be marketed to individual investors, oversaw €12 trillion (US$13 trillion) in combined assets at the end of 2022, according to the European Fund and Asset Management Association.
Jupiter Fund Management Plc’s compliance department forced its investment team to cancel a crypto investment in one of its Irish Ucits funds, the Financial Times reported in February. Ireland’s financial regulator prohibits all crypto exposure in Ucits, while Spain permits such funds to invest in crypto exchange-traded products as long as they don’t contain derivatives.
Demand for exposure to cryptocurrencies among institutional investors has spiked in recent months, with the U.S. Securities and Exchange Commission’s Jan. 10 decision to permit spot Bitcoin ETFs sparking a rally in digital assets. The increasing overlap between crypto and traditional finance makes the digital-assets part of the Ucits review even more crucial to get right, Ross said.
“What we’re seeing happen is just an increased interconnectedness between cryptoassets and the traditional financial sector and various products,” she said, pointing to the U.S. ETFs and the U.K. financial regulator’s announcement in February that it won’t object to applications to list similar products on London trading venues.
The regulator, established in 2011 and located in Paris, has just over 300 employees according to its website. Its budget for this year outlined an expected €75.2 million in expenditure, unchanged from last year.
ESMA’s travails come at a pivotal time for European crypto regulations. The Markets in Cryptoassets act, the EU’s first unified industry legislation, is due to take effect starting in January 2025. Meanwhile, rival financial centers like Hong Kong and Dubai have already adopted new frameworks for overseeing digital assets.
As it helps lay the groundwork for MiCA, the EU watchdog has had to consider where it can afford to hire new staff and whether existing employees can be retrained to focus on areas like crypto, Ross said.
“The main kind of mitigation that we have is to actually rudely and rigorously prioritize, because given the additional mandates and the limited resources, we are not able to do everything all the time to the envisaged timelines,” Ross said.
Preparatory work on MiCA is “a priority,” she said. Still, ESMA may have to consider a phased delivery of the legislation for both the regulator and the 27 EU member states to start rolling out the legislation on time, she added.
