Regulation
ESMA plans to add crypto to EU UCITS investment market, estimated at $12.8 trillion
The European Union (EU) is taking cautious steps to include cryptocurrencies in its broad investment landscape. The European Securities and Markets Authority (ESMA), the EU’s financial regulator, is ask for expert opinions on the possibility of authorizing undertakings for collective investment in transferable securities (UCITS) to hold crypto assets.
If 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. The inclusion of crypto would represent a significant shift in the EU’s approach to digital assets, traditionally characterized by stricter regulations than other regions.
The current proposal does not envisage 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 investor protection while recognizing the growing interest in cryptocurrencies.
The consultation period for industry stakeholders to provide feedback runs until August 7, 2024. These comments will be crucial in shaping the final decision on the inclusion of crypto in UCITS.
The role of ESMA in the regulation of UCITS
ESMA’s decision coincides with a broader shift in the global regulatory landscape towards crypto. The recent approval of spot Bitcoin ETFs in the United States and Hong Kong demonstrates a growing comfort level in integrating cryptocurrencies into traditional investment vehicles. However, unlike these crypto-only ETFs, mutual funds would offer a diversified portfolio with crypto as a potential component.
Nicolas Streschinsky, head of DeFi at Trilitech, a Tezos blockchain R&D center, believes this inclusion could broaden the crypto investor base. “A small percentage of crypto assets within mutual funds could attract investors seeking exposure to utility tokens used for transactions,” he points out.
Adding a new type of investment like cryptocurrency also raises some questions. A significant concern is the potential effect of MiCA, the comprehensive European regulation on cryptocurrencies, currently under development. ESMA is seeking comments on the impact that MiCA could have on the inclusion of specific cryptocurrencies within UCITS.
The EU’s exploration of the possibility of allowing cryptocurrencies in UCITS is a significant development. This shows a willingness to adapt to changing financial trends while focusing on investor protection. The next few months will be crucial as industry feedback will help guide the final decision, potentially opening the door to a €12 trillion market for cryptocurrency assets.
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