ETFs
ESMA asks whether crypto ETFs should be eligible assets for EU UCITS funds – Ledger Insights
The European Securities and Markets Authority (ESMA) opened a call for proof concerning assets eligible for UCITS funds. UCITS represent 75% of collective investments made by individual investors in the European Union. Given that the list of eligible UCITS assets was last revised in 2007, ESMA is investigating which liquid assets might be suitable for inclusion in UCITS for retail investors. Therefore, one of the questions is whether cryptoassets should be allowed as eligible investments and indirect exposure through crypto ETFs in particular.
ESMA wants to know what types of cryptocurrencies could be considered. Mutual funds require assets to be liquid, so the fact that Bitcoin and Ether represent almost two-thirds of the market capitalization of all cryptocurrencies is an indicator of this. Additionally, ESMA wants to know whether the new MiCA crypto regulation has any impact on this assessment.
ESMA places emphasis on derivatives and some exchange-traded products currently held in UCITS provide indirect exposure to assets that are not eligible for direct investment. For example, direct investments in real estate are not sufficiently liquid. However, a good number of mutual funds invest in real estate investment trusts (REITs).
UCITS funds have several eligibility criteria for assets such as liquidity, risk diversification, impact on redemption of units or shares and the ability to calculate net asset value.
Crypto is just one asset class in ESMA’s list of 19 elements. For example, the list includes commodities such as precious metals that are not permitted as direct investment under current rules, although “incidental liquid assets” are permitted. The questionnaire therefore concerns commodity ETFs which underlie several UCITS. Other assets on the list include unlisted shares, real estate, emissions allowances and asset-backed securities.
The call for evidence closes on August 7.
MiCA Progress
At the same time, ESMA has the legal responsibility to establish rules and procedures for the regulation of MiCA crypto assets. In March, it finalized the rules for register as a crypto asset service provider (CASP) or for incumbents to inform their regulator of planned CASP activities. It recently shared its comments following a consultation on when an asset is considered a security against a crypto. Additionally, there was another consultation on crypto promotions from third-country PSAPs.