The European Union (EU) is taking a cautious but significant step towards embracing cryptocurrencies in its traditional financial markets.
The European Securities and Markets Authority (ESMA), the EU’s financial watchdog, has initiated a review process to consider including crypto assets as eligible investments in the Undertakings for Collective Investment in Transferable Securities (UCITS) fund market, valued at approximately €12 trillion ($12.8 trillion).
TLDR
- The European Securities and Markets Authority (ESMA) is considering including cryptocurrencies as eligible assets in the €12 trillion Undertakings for Collective Investment in Transferable Securities (UCITS) fund market.
- ESMA is seeking feedback from stakeholders until August 7, 2024, on whether UCITS can include exposure to assets beyond traditional stocks and bonds, including cryptocurrencies.
- The inclusion of crypto assets in UCITS could open up a market larger than the Bitcoin exchange-traded funds (ETFs) approved in the US and Hong Kong.
- The EU’s Markets in Crypto-Assets (MiCA) regulation, which establishes guidelines for crypto asset custody, could play a role in facilitating the integration of cryptocurrencies into UCITS.
- While the move could be a significant step towards mainstream crypto adoption in Europe, challenges remain, such as coordinating UCITS regulations with MiCA and addressing custody issues.
UCITS are a group of investment funds created to facilitate and secure investment transactions within the EU. These funds, which can be structured as mutual funds, exchange-traded funds (ETFs), or money market funds, are regulated by the European Union but available to investors worldwide. Currently, UCITS investments are limited to traditional assets like stocks and bonds.
ESMA’s move comes at a time when regulators worldwide are becoming more open to integrating cryptocurrencies into traditional investment products.
The recent approval of spot Bitcoin ETFs in the United States and Hong Kong has demonstrated a significant shift towards the inclusion of crypto assets in the operations of conventional financial entities.
The European Union’s exploration of crypto inclusion within UCITS could potentially open up a market larger than the recently approved Bitcoin ETFs.
Industry experts suggest that if ESMA decides to include cryptocurrencies in UCITS, it could be a “game changer” for the crypto industry in Europe.
JUST IN: 🇪🇺 EU Securities Authority is exploring adding #Bitcoin and Crypto exposure to the €12T investment market.
EU is gearing up 🙌 pic.twitter.com/kVYZrrEFCx
— Bitcoin Magazine (@BitcoinMagazine) May 9, 2024
Unlike the US, where each ETF needs individual approval for each new asset, UCITS funds in the EU could potentially encompass multiple cryptocurrencies under a single regulation, simplifying the investment process and increasing accessibility.
It is unlikely that ESMA will approve standalone investment funds entirely composed of cryptocurrencies. Instead, the watchdog is considering allowing UCITS funds to allocate a small percentage of their assets to crypto investments, catering to investors with different risk preferences.
One of the challenges ESMA faces is aligning the potential inclusion of cryptocurrencies with the EU’s proposed Markets in Crypto-Assets (MiCA) regulation.
MiCA aims to create a comprehensive regulatory system for crypto assets across the EU, including guidelines for asset segregation and custody. ESMA is examining how MiCA could affect the inclusion of specific cryptocurrencies in the UCITS framework.
While the EU’s exploration of crypto inclusion within UCITS is a significant development, the path to mainstream crypto integration in the EU is likely to be gradual and cautious.
Experts highlight that the process of updating the UCITS eligible assets rules will be subject to extensive negotiation and scrutiny.
One of the key challenges that need to be addressed is the custody of crypto assets within the UCITS framework. The regulation on depository banks for traditional funds may need to be coordinated with the crypto-asset custody policies outlined in MiCA.
Despite these challenges, the potential inclusion of cryptocurrencies in UCITS could be a game-changer for the crypto industry in Europe. It would not only provide broader access to crypto investments but also signal a shift in the EU’s stance towards embracing digital assets within its financial system.
