Regulation
EU eyes crypto integration in $12.88 trillion market
The European securities regulator is seeking stakeholder views on the potential inclusion of crypto assets in a potentially massive market. The European Securities and Markets Authority (ESMA), the regulatory authority responsible for overseeing financial markets in the European Union, recently launched a comprehensive review of the regulations surrounding the Eligible Assets Directive (EAD) of undertakings for collective investment in transferable securities (UCITS). .
The move could potentially enable the integration of cryptocurrencies into a vast investment market valued at around €12 trillion (around $12.88 trillion). On May 7, 2024, ESMA released a call for evidence seeking views from various stakeholders to assess the viability and implications of allowing UCITS to include a wider range of asset classes, including cryptocurrencies.
The UCITS framework, at the heart of retail investing in the EU, accounts for around 75% of all retail investment in collective funds in the region. With their global reputation for strict regulation and investor protection, the inclusion of cryptocurrencies could represent a transformative change in the investment landscape.
The next big catalyst for crypto?
ESMA’s review aims to respond to the evolving financial landscape, in which the number and variety of financial instruments have expanded significantly since the inception of the UCITS framework almost two decades ago. This expansion has led to uncertainties in determining asset eligibility, causing divergent interpretations and applications of the Directive between Member States.
Financial regulation expert Sean Tuffy highlighted the importance of this development for DL News, stating: “If ESMA is convinced, this would be the final step towards the integration of crypto assets in Europe”, calling it a potential “game changer”. This sentiment is echoed by industry experts who believe that the inclusion of crypto assets could provide a strong alternative to traditional investment options, potentially improving portfolio diversification and returns.
The call for contributions is aimed at a broad audience, including investors, consumer groups, UCITS management companies, self-managed UCITS investment companies, depositaries and professional associations. These stakeholders are invited to share their views on market practices, interpretation issues and practical application concerns related to the eligibility criteria and other provisions of the UCITS EAD.
A key area of focus is the cross-sectional consistency of key notions and definitions used in the UCITS EAD with other pieces of legislation in the EU Single Regulation. This alignment is crucial to ensure that all new asset classes, such as cryptocurrencies, are integrated smoothly and consistently across all regulatory frameworks.
Andrea Pantaleo, a lawyer specializing in cryptocurrency regulation, highlighted several potential benefits and challenges. He told DL News: “UCITS funds have specific investment limits depending on the type of assets. We will not have 100% crypto UCITS funds, but we hope that many investment funds will be able to hold 1-2% of their liquidity in crypto.
But he also pointed out a major obstacle: the coordination of jail regulations, which must align with the upcoming European Regulation on Markets in Crypto-Assets (MiCA). MiCA is set to establish strict rules for asset segregation and policies for their custody, which will be essential for the safekeeping of crypto assets.
The potential inclusion of cryptocurrencies in mutual funds comes at a time when other major economies, such as WE And Hong Kong, have started to integrate crypto assets into their financial products, notably through the approval of Bitcoin ETFs. These developments have not only validated the financial viability of cryptocurrencies but also spurred significant investment flows into the sector.
ESMA’s consultation process is expected to conclude on August 7, 2024, after which the watchdog will compile comments and develop its technical advice to the European Commission. This guidance will play a crucial role in determining whether cryptocurrencies will be included under UCITS, potentially heralding a new era for cryptocurrency investment in Europe.
At press time, the total crypto market capitalization stood at $2.202 trillion.
Featured image created with DALL·E, chart from TradingView.com