EU securities watchdog plans to include crypto in investment products and expand market access

Last updated: May 9, 2024 at 6:12 a.m. EDT | 2 minutes of reading

The European Union (EU) securities watchdog, the European Securities and Markets Authority (ESMA), is seeking stakeholder views on the potential inclusion of crypto assets in investment products .

The move has the potential to open up a vast market for cryptocurrencies, surpassing the reach of spot Bitcoin exchange-traded funds (ETFs).

ESMA call for contributions aims to expand the assets eligible for Undertakings for Collective Investment in Transferable Securities (UCITS), a market valued at 12,000 billion euros.

Approval of crypto assets for mutual funds could expand market access

Approving crypto assets for EU UCITS would provide wider access to cryptocurrencies within the €12 trillion market.

In the United States, funds managed by major players like BlackRock and Grayscale have already raised around $18 billion since the start of the year, playing an important role in driving the Bitcoin rally in the first quarter of 2024.

However, approval is not guaranteed and ESMA is seeking feedback from stakeholders until August 7 to gather views and ideas.

Andrea Pantaleo, crypto regulation and litigation attorney at DLA Piper, believes in impact would be larger than that of US ETFs, as several fund sub-funds could express interest in investing small percentages of cash in crypto assets.

One of the benefits of access to mutual funds for the crypto sector is the diversity of its investment categories.

UCITS investments encompass different funds with different asset allocations based on their risk profiles.

This framework could also benefit market liquidity, as authorization would not be required for each individual investment in crypto assets, unlike in the United States, where ETFs are based on single assets requiring regulatory authorization.

Obstacles to overcome before crypto is included in EU UCITS

While there are potential benefits, there are still hurdles to overcome before crypto assets can be included under UCITS.

Custody poses a significant challenge, as regulations for custodian banks must be coordinated with the custody of crypto assets.

The EU is in the process of implementing the Markets in Crypto-Assets (MiCA) Regulation, which includes custody and asset segregation rules for custodians.

Crypto assets involved in mutual funds would likely have to comply with these rules.

ESMA is specifically seeking comments on how the inclusion of specific cryptocurrencies under UCITS would be affected by MiCA.

However, the process of updating the rules relating to UCITS eligible assets is expected to take time and be subject to negotiation.

It will likely be a long road before a final decision is made on whether crypto assets will be permitted in mutual funds.

Last month, the The EU was officially adopted anti-money laundering regulations (AMLR), applicable to all crypto-asset service providers (CASP).

The laws would give more powers to financial intelligence units (FIUs) to detect and combat money laundering and terrorist financing.

As noted, Western Europe has has become a leading region in global crypto adoption, attracting a significant number of daily traders, ranging from 1.2 million to 1.5 million individuals.

Another recent survey found that almost 50% of European cryptocurrencies holders owned Bitcoin in February.

Fuente