EU Considers Adding Cryptos into €12Tn Investment Market, Surpassing the Scale of Bitcoin ETFs

ESMA seeks feedback on adding crypto into traditional investment products that may unlock a massive €12 trillion investment market. Stakeholders are asked to provide their thoughts by August 7, in a move that would outstrip the spot bitcoin ETFs market.

The European Securities and Markets Authority (ESMA) has initiated a consultation to gather views from industry practitioners and specialists on the possible inclusion of virtual assets into the broader investment universe of Europe via Undertakings for Collective Investment in Transferable Securities (UCITS).

This growth, which could create a massive €12 trillion investment market, could outstrip the spot bitcoin ETFs market. 

In Europe, UCITS investment funds can invest more liquidities in various crypto assets without individual approval. Although there are no current intentions to launch a UCITS fund wholly dedicated to cryptocurrency, many investment funds might invest 1-2% of their portfolios into crypto assets, thus widening the connection between conventional finance and the emerging crypto market. 

However, implementing this suggestion as operational policy is yet to happen. ESMA is to collect comprehensive stakeholder feedback by August 7th. This step represents what might be the last step towards integrating crypto assets into Europe's financial system.

This phase is under consideration because the region could be following in the footsteps of both the U.S. and Hong Kong, where Bitcoin ETFs have been given the green light, and have attracted significant traditional financial participation. These two potential sources of expansion, BlackRock and Grayscale, had recorded an inflow of around $18 billion from the U.S. market into their funds since the beginning of January alone.

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Integrating cryptocurrencies into the UCITS structure might have a larger impact than the U.S. Bitcoin ETFs. The diversity of UCITS, whereby several fund compartments may be accessible to allocate small percentages of liquidity towards crypto assets, would further expand the flexibility and opportunities for investment strategies within the region.

While the U.S. ETF model defines specific single assets needing particular regulatory approval, UCITS allows broader diversification of assets without separate crypto investment approvals, a move that could substantially improve market liquidity.

Although it is improbable that UCITS fund will be fully crypto-composed, the potential framework allows several funds to have 1-2% of their cryptocurrency holdings, fostering slow but significant adoption.

In the EU, Bitcoin ETPs are on the market. However, these offerings are not as popular and not as large in size as their U.S. counterparts, where similar products are structured just like  a traditional ETF, and are already attracting massive attention and investment. 

Challenges Ahead

The challenges are enormous before even considering the addition of crypto assets into the regulatory system. The main issue is custody, more specifically how the rules guiding depository banks for traditional funds can be harmonised with those for crypto-assets custody.
 

Step by step, the European Union is introducing the legal foundation for the cryptocurrency markets - the Markets in Crypto-Assets regulation (MiCA) - a structure providing custodian criteria, such as asset integration and safekeeping policies.

The crypto assets included in UCITS must meet these requirements. Thus, the ESMA is gathering feedback to comprehend the consequences of embedding particular cryptocurrencies into this system and the potential problems that MiCa presents.

Updating the UCITS eligible assets rules not only is time-consuming, but would also require intensive negotiations. A long road may be ahead before cryptocurrencies are allowed into UCITS. The whole exercise aims to ensure that the inclusion of these digital assets does not undermine the strict standards set for financial instruments and their custodians in the EU.