The European Securities and Markets Authority (ESMA), the securities watchdog of the European Union (EU), is considering the inclusion of cryptocurrencies in investment products and has called for input from stakeholders. This move has the potential to create a vast market for cryptocurrencies that goes beyond spot Bitcoin exchange-traded funds (ETFs).
If approved, this inclusion would expand access to cryptocurrencies within the €12 trillion market of Undertakings for Collective Investment in Transferable Securities (UCITS). In the US, major players like BlackRock and Grayscale have already attracted around $18 billion in funds since the start of the year, which played a significant role in driving the Bitcoin rally in the first quarter of 2024.
However, ESMA does not guarantee approval and is seeking stakeholder input until August 7 to gather different perspectives and insights. Andrea Pantaleo, a lawyer specializing in crypto regulation and litigation at DLA Piper, believes that the impact of this approval would be more significant than that of US ETFs. This is because multiple fund compartments in the EU 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 risk profiles and asset allocations. This framework could benefit market liquidity, as it would not require regulatory authorization for each individual investment in crypto assets, unlike in the US, where ETFs are based on single assets and require regulatory approval.
However, there are still obstacles to overcome before crypto assets can be included in the UCITS framework. One major challenge is custody, as regulations for depository banks need to be coordinated with the custody of crypto assets. The EU is currently 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.
Updating the UCITS eligible assets rules is expected to be a time-consuming process that will require negotiation. It will likely be a while before a definitive decision is made regarding whether crypto assets will be allowed in UCITS.
In addition, the EU recently passed an anti-money laundering regulation applicable to all crypto-asset service providers (CASPs). These laws aim to provide more powers to Financial Intelligence Units (FIUs) to detect and combat money laundering and terrorist financing.
Western Europe has emerged as a leading region in global crypto adoption, attracting a substantial number of daily traders, ranging from 1.2 million to 1.5 million individuals. A recent survey also revealed that nearly 50% of European cryptocurrency holders owned Bitcoin in February.
