EU Considers Integrating Cryptocurrencies into its €12 Trillion Investment Market, Potentially Outpacing Bitcoin ETFs

The European Securities and Markets Authority (ESMA) is seeking feedback from stakeholders on whether to include crypto assets in investment products, a move that could bring cryptocurrencies into a market much larger than that of current spot Bitcoin exchange-traded funds (ETFs).

Broadening the UCITS Framework

ESMA is asking industry and experts for their opinion on expanding the “EU Undertakings for Collective Investment in Transferable Securities” (UCITS) framework to include eligible crypto assets. This could potentially open the door for wider access to cryptocurrencies through UCITS, a market valued at €12 trillion.

“If ESMA is convinced, this would be the final step in mainstreaming crypto assets in Europe,” said Sean Tuffy, a financial regulation expert, to DLnews, calling it a potential “game-changer.”

Impact Beyond the U.S. ETFs

Previously, regulators in the U.S. and Hong Kong approved Bitcoin ETFs this year, highlighting traditional financial institutions’ major moves into the cryptocurrency sector. For instance, funds operated by BlackRock and Grayscale in the U.S. have raised about $18 billion since January this year, playing a key role in Bitcoin’s price rise in the first quarter of 2024.

Consultation and Potential Implications

The consultation with stakeholders will remain open until August 7. “The impact could be greater than that of the U.S. ETFs,” said Andrea Pantaleo, a lawyer specializing in crypto regulation and litigation at DLA Piper. He added that many funds might be interested in allocating a small portion of their liquidity to crypto assets.

Understanding UCITS

UCITS funds are diversified across various asset categories, each assigned based on risk and circumstances, allowing for potentially greater flexibility in crypto investments.

“Under the EU framework, funds would not need authorization each time they invest in crypto assets, which would also benefit market liquidity,” Pantaleo noted. In contrast, U.S. ETFs are based on single assets and require regulatory approval.

Challenges Ahead

However, before crypto assets can be fully integrated into this framework, there are significant hurdles to overcome. “The only issue might be custody,” Pantaleo explained, emphasizing that regulations governing custodial services for fund deposits should be aligned with those for crypto asset custody.

The EU is set to roll out its crypto legal framework, the Markets in Crypto-Assets (MiCA), in the coming years. MiCA establishes rules for asset segregation and custody policies for custodians.

Regulatory Environment

The EU is also tightening its stance on cryptocurrencies by banning mixers and requiring crypto companies to monitor users, a move that impacts the anonymity in decentralized finance (DeFi).

This significant step by the EU could redefine the landscape of crypto investments in Europe, expanding the potential for institutional and retail investment while navigating the complexities of regulatory compliance.