EU Watchdog Considers Crypto Integration Into $12.88 Trillion Investment Market
May 09 2024 - 9:00AM
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Europe’s securities regulator is seeking input from stakeholders on
the potential inclusion of crypto assets in a potentially massive
market. The European Securities and Markets Authority (ESMA), the
regulatory authority responsible for overseeing financial markets
within the European Union, has recently initiated a comprehensive
review of the regulations surrounding the Undertakings for
Collective Investment in Transferable Securities (UCITS) Eligible
Assets Directive (EAD). This move could potentially enable the
integration of cryptocurrencies into a vast investment market
valued at approximately €12 trillion (roughly $12.88 trillion). On
May 7, 2024, ESMA released a Call for Evidence seeking input from
various stakeholders to assess the viability and implications of
allowing UCITS to include a broader array of asset classes, notably
cryptocurrencies. The UCITS framework, central to EU retail
investment, accounts for around 75% of all retail investment in
collective funds within the region. With its global reputation for
strict regulation and investor protection, the inclusion of
cryptocurrencies could represent a transformative shift in the
investment landscape. The Next Big Catalyst For Crypto? ESMA’s
review aims to address the evolving financial landscape, where the
number and variety of financial instruments have expanded
significantly since the UCITS framework was established nearly two
decades ago. This expansion has led to uncertainties in determining
asset eligibility, causing divergent interpretations and
applications of the directive across member states. Sean Tuffy, a
financial regulation expert, underscored the significance of this
development to DL News, stating, “If ESMA is convinced, it would be
the final step in mainstreaming crypto assets in Europe,” referring
to it as a potential “game changer.” This sentiment is echoed by
industry experts who believe that the inclusion of crypto assets
could provide a robust alternative to traditional investment
options, potentially enhancing portfolio diversification and
returns. Related Reading: Crypto Traders Discuss Why Memecoins Have
Been 2024’s Most Profitable Narrative The Call for Evidence targets
a broad audience, including investors, consumer groups, UCITS
management companies, self-managed UCITS investment companies,
depositaries, and trade associations. These stakeholders are
invited to share their insights on market practices, interpretative
issues, and practical application concerns related to the
eligibility criteria and other provisions of the UCITS EAD. One of
the critical areas of focus is the transversal consistency of key
notions and definitions used in the UCITS EAD with other pieces of
legislation in the EU Single Rulebook. This alignment is crucial to
ensure that any new asset classes, such as cryptocurrencies, are
integrated smoothly and consistently across all regulatory
frameworks. Andrea Pantaleo, a lawyer specializing in crypto
regulation, highlighted several potential benefits and challenges.
He told DL News, “UCITS funds have specific investment limitations
depending on the type of assets. We won’t have a 100% crypto UCITS
fund, but hopefully many investment funds could hold 1-2% of their
liquidity in crypto.” Related Reading: This Week’s Crypto
Watchlist: Top Coins Poised For Gains However, he also pointed out
a significant obstacle: the coordination of custody regulations,
which must align with the EU’s upcoming Markets in Crypto-Assets
regulation (MiCA). MiCA is set to establish stringent rules for the
segregation of assets and policies for their safekeeping, which
will be pivotal in the custody of crypto assets. The potential
inclusion of cryptocurrencies in UCITS comes at a time when other
major economies, such as the US and Hong Kong, have begun
integrating crypto assets into their financial products, notably
through the approval of Bitcoin ETFs. These developments have not
only validated the financial viability of cryptocurrencies but have
also spurred significant investment inflows into the sector. The
ESMA consultation process is set to conclude on August 7, 2024,
after which the watchdog will compile the feedback and develop its
technical advice to the European Commission. This advice will play
a crucial role in determining whether cryptocurrencies will be
included in the UCITS framework, potentially heralding a new era
for crypto investment in Europe. At press time, the total crypto
market cap stood at $2.202 trillion. Featured image created with
DALL·E, chart from TradingView.com
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