The European Securities and Markets Authority (ESMA), the regulatory body governing the financial markets of the EU, has recently launched an exploratory inquiry into the potential inclusion of crypto assets into the massive European investment market. This review marks an investigation into the regulations surrounding the Undertakings for Collective Investment in Transferable Securities Eligible Assets Directive (UCITS EAD), a possible stepping stone for the integration of cryptocurrencies into an extensive investment market valued at an estimated €12 trillion (approximately $12.88 trillion).
The ESMA, on May 7, 2024, issued a Call for Evidence, signaling its intention to gather insights from various stakeholders. The goal is an exhaustive assessment of the feasibility and implications of permitting UCITS to encompass a wider range of asset classes, notably cryptocurrencies.
With the UCITS framework accounting for about 75% of all retail investment in collectively pooled funds within the European Union, this initiative stands to significantly revolutionize the investment landscape. The framework, known for its stringent regulations and robust investor protection mechanisms, could be on the precipice of a transformative shift with the potential inclusion of cryptocurrencies.
The review by the ESMA is an attempt to respond to the ever-evolving financial landscape. The past two decades have seen the variety and number of financial instruments expand significantly since the inception of the UCITS framework. These developments have led to uncertainties regarding asset eligibility, resulting in diverse interpretations and applications of the directive across EU member countries.
Financial regulation expert, Sean Tuffy, emphasized the potential impact of this review. “If the ESMA is convinced, it would be the final step in mainstreaming crypto assets in Europe,” he said, referring to this entire process as a potential “game-changer.” His sentiment is mirrored by other industry experts who suggest that the inclusion of cryptocurrencies could provide potential investors with solid alternatives to traditional investment options, possibly boosting portfolio diversity and return yields.
The Call for Evidence aims to cast a wide net, soliciting feedback from investors, consumer groups, UCITS management companies, self-managed UCITS investment companies, depositaries, and trade associations. They are invited to share their insights into market practices, interpretative issues, and potential challenges tied to the practical application of the UCITS EAD.
A key pointer for this review is the need for consistency of key terms and definitions used in the UCITS EAD across other legislation within the EU Single Rulebook. This alignment is crucial to ensure smooth and uniform integration of any new asset classes, such as cryptocurrencies, across all regulatory frameworks.
On the other hand, Andrea Pantaleo, a lawyer known for his expertise in crypto regulation, identifies potential benefits and challenges. He voiced his expectations saying, “UCITS funds have specific investment limitations depending on the type of assets. We won’t have a 100% crypto UCITS fund, but hopefully, many investment funds could hold 1-2% of their liquidity in crypto.”
The potential integration of cryptocurrency into UCITS arrives on the scene when other major economies, particularly the US and Hong Kong, have started incorporating crypto assets into their financial products. With the recent approval of Bitcoin ETFs, not only has the financial viability of cryptocurrencies been affirmed, but it has also experienced significant investment inflows into the sector.
ESMA’s consultation is slated to conclude on August 7, 2024, post which, the feedback will be collated and utilised to shape its technical advice to the European Commission. The insights gathered could significantly impact whether or not cryptocurrencies will be integrated into the UCITS framework, potentially marking a new chapter for cryptocurrency investment in Europe.
At the moment of reporting, the total crypto market capitalization was standing strong at $2.202 trillion.