EU Regulator Considers Inclusion of Crypto Assets in €12 Trillion UCITS Funds

The European Securities and Markets Authority (ESMA) has sought input from stakeholders on the feasibility of incorporating digital assets into UCITS funds.

According to a 2023 report by the EFAMA, the total volume of this sector has reached €12 trillion.

During discussions, which will continue until August 7, ESMA hopes to assess the potential risks and benefits associated with integrating this new asset class.

“UCITS are a key retail investment vehicle in the EU, accounting for about 75% of all collective investments. The instrument’s recognized success as a global brand is based on its established reputation as a well-regulated and supervised investment product,” stated the agency’s press release.

However, for certain cryptocurrencies to be included in the fund list, the coins in question must comply with the “UCITS Eligible Assets Directive.”

Financial regulation expert Sean Tuffy told DL News that potential expansion into UCITS “would be the final step in the spread of crypto assets in Europe and a game changer.”

“The impact will be more significant than with American ETFs, as many fund sectors are interested in investing a small percentage of liquidity in crypto assets,” noted DLA Piper lawyer Andrea Pantaleo.

In her view, the EU structure could benefit market liquidity by allowing funds “not to seek [regulators’] permission each time they invest in digital assets.”

Pantaleo emphasized that one should not expect a UCITS composed entirely of cryptocurrencies, but many funds could allocate 1-2% of their portfolio to them.

The only issue with integrating digital assets might be custody, according to the lawyer.

In May 2023, the EU Council unanimously approved a bill to regulate the crypto asset market. The document requires companies to obtain a license to operate in the EC, and stablecoin issuers to have reserve backing.

In January 2024, EU authorities provisionally agreed on a package of measures to combat money laundering and terrorist financing, which will tighten existing rules for the crypto industry.

In March, European Parliament committees endorsed a law banning anonymous transactions.