EU mulls adding crypto in €12tn investment market bigger than Bitcoin ETFs

The European Union securities watchdog is asking stakeholders whether it should include crypto assets into investment products — a move that could enable crypto to tap a market bigger than spot Bitcoin exchange-traded funds.

The European Securities and Markets Authority is asking industry and experts to provide input on expanding the assets eligible for the network — called Undertakings for Collective Investment in Transferable Securities, or UCITS.

The move opens the door to broader access to cryptocurrencies via UCITS, a €12 trillion market.

If ESMA is convinced, it would be the “final step in mainstreaming crypto assets in Europe,” financial regulation expert Sean Tuffy told DL News, calling it a potential “game changer.”

It comes on the back of the US and Hong Kong regulators approving Bitcoin ETFs this year, highlighting how traditional financial players are muscling into crypto.

In the US alone, funds run by the likes of BlackRock and Grayscale each raked in roughly $18 billion since January — becoming a key driver of the Bitcoin rally in the first quarter of 2024.

However, approval is not a forlorn conclusion.

August deadline

ESMA’s call for stakeholder input is open until August 7,

“The impact would be more significant than the US ETFs,” Andrea Pantaleo, a lawyer specialised in crypto regulation and litigation at DLA Piper, told DL News.

“Because there could be plenty of fund compartments interested in investing small percentages of liquidity in crypto-assets.”

What is UCITS?

There are several reasons why accessing UCITS could prove a boon for the industry.

UCITS investments are made up of many different categories for funds which have different assets allocated to them depending on their risk and profile.

There is another way the EU framework could benefit crypto: “Authorisation is not required for each time a fund invest in crypto-assets, and this would also benefit market liquidity,” Pantaleo said.

In the US, ETFs are based on single assets which regulators need to authorise.

But in Europe, UCITS investment funds can allocate liquidity to more crypto assets without obtaining authorisation beforehand for each one.

“UCITS funds have specific investment limitations depending on the type of assets,” Pantaleo said. “We won’t have a 100% crypto UCITS fund, but hopefully many investment funds could hold 1-2% of their liquidity in crypto.”

While investors can trade Bitcoin exchange-traded products in the EU, they haven’t been as popular as their US counterparts. Asset managers in the EU already offer ETPs which behave like ETFs.

Obstacles

But there is a long way to go before crypto assets are potentially included into the framework.

“The only issue could be custody,” Pantaleo said, as the regulation on depository banks for funds should be coordinated with crypto-assets custody.

The EU bloc is rolling out its legal framework for crypto over the coming years known as the Markets in Crypto-Assets regulation, or MiCA. For custodians, MiCA lays down rules for segregation of assets and policies for safekeeping.

Crypto assets involved in UCITS would likely need to comply to the same rules.

To this effect, the ESMA has also asked for specific feedback on how adding specific cryptocurrencies to the framework would or wouldn’t be affected by MiCA.

“The process of updating the UCITS eligible assets rules is not quick and will be subject to a lot of negotiation,” Tuffy said.

“We’ve got a long road to go before we’ll know if crypto will be allowed into UCITS.”

Inbar Priess is a Regulation Correspondent at DL News. Got a tip? Email her at inbar@dlnews.com.