EU Securities Regulator Considers Including Cryptocurrencies in Investment Products, Expanding Market Access
The European Securities and Markets Authority (ESMA), the securities watchdog of the European Union (EU), is seeking input from stakeholders regarding the potential inclusion of cryptocurrencies in investment products. This move could lead to a significant expansion of the cryptocurrency market, going beyond the scope of spot Bitcoin exchange-traded funds (ETFs).
ESMA’s call for input aims to broaden the range of assets eligible for Undertakings for Collective Investment in Transferable Securities (UCITS), a market valued at €12 trillion.
Approval of crypto assets for UCITS could 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 attracted around $18 billion since the beginning of the year, playing a significant role in driving the Bitcoin rally in the first quarter of 2024.
However, approval is not guaranteed, and ESMA is seeking stakeholder input until August 7 to gather perspectives and insights. Andrea Pantaleo, a lawyer specializing in crypto regulation and litigation at DLA Piper, believes that the impact would be more substantial than that of US ETFs. This is because multiple fund compartments could express interest in investing small percentages of liquidity in crypto assets.
One advantage of accessing UCITS for the crypto industry is the diverse investment categories it offers. UCITS investments encompass various funds with different asset allocations based on their risk profiles. This framework could also benefit market liquidity, as it would not require individual regulatory authorization for each investment in crypto assets, unlike in the US, where ETFs are based on single assets that require regulatory approval.
However, there are still obstacles to overcome before crypto assets can be included in the UCITS framework. One significant challenge is custody, as regulations for depository banks need to align with the custody of crypto assets. The EU is in the process of implementing the Markets in Crypto-Assets regulation (MiCA), which includes rules for the safekeeping and segregation of assets for custodians. Crypto assets involved in UCITS would likely need to comply with these rules.
ESMA is specifically seeking feedback on how the inclusion of specific cryptocurrencies in the UCITS framework would be affected by MiCA. Nevertheless, the process of updating the UCITS eligible assets rules is expected to be time-consuming and subject to negotiation. It will likely take a while before a definitive decision is made on whether crypto assets will be allowed in UCITS.
Last month, the EU formally passed an anti-money laundering regulation (AMLR) that applies to all crypto-asset service providers (CASPs). These laws grant more powers to Financial Intelligence Units (FIUs) to detect and combat money laundering and terrorist financing.
As previously reported, Western Europe 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. Additionally, a recent survey revealed that nearly 50% of European cryptocurrency holders owned Bitcoin in February.
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