The European Securities and Markets Authority (ESMA) has initiated a review of the rules for investing in crypto assets by UCITS (Undertakings for Collective Investment in Transferable Securities) as part of a broader review of the EU’s financial regulatory framework.
The judgement comes in response to a request from the European Commission (EC) to ensure that UCITS rules keep pace with rapid market developments, including the fast-growing crypto sector.
Re-evaluate asset recognition
Since the implementation of the UCITS Eligibility Assets Directive in 2007, the landscape of financial instruments has expanded significantly, necessitating a re-evaluation of which assets should be accessible to UCITS funds.
These funds are known for their high level of investor protection and are a popular choice among private and institutional investors across Europe and worldwide.
The current regulatory framework defines the criteria for assets in which UCITS can invest, with the aim of ensuring liquidity and risk diversification.
However, the rise of digital assets such as cryptocurrencies has brought new challenges and opportunities that existing guidelines do not specifically address. Digital assets, known for their high volatility and trends in emerging markets, pose unique risks and potential rewards for investors that should be appropriately regulated.
Notably, UCITS funds typically revolve around securities, and the inclusion of crypto could imply that digital assets would be regulated as such in the EU. The watchdog has not yet made its position on this clear.
Consultation process
ESMA’s call for evidence seeks input from stakeholders on how the UCITS framework can be adapted to include digital assets, focusing on direct and indirect exposure. The agency is particularly interested in understanding the implications of allowing UCITS to invest in crypto – both in terms of investor protection and market stability.
The consultation process, which will remain open until August 7, will gather feedback from investment firms, consumer advocacy groups and other financial entities.
ESMA will consider these responses when preparing its technical advice to the Commission, which is expected to address whether and how to extend the scope of eligible assets to cryptocurrencies and other contemporary investment vehicles.
As financial markets continue to develop, the outcome of this assessment could have a significant impact on the accessibility of crypto investments for European funds, potentially paving the way for greater integration of digital assets into mainstream financial portfolios.
The findings will also impact how these assets are regulated, balancing innovation with investor protection in the rapidly changing landscape of global finance.