EU securities watchdog to review crypto eligibility for UCITS investments

The European Securities and Markets Authority (ESMA) has initiated a review of the rules governing crypto asset investments by UCITS (Undertakings for Collective Investment in Transferable Securities) as part of a broader examination of the EU’s financial regulatory framework.

The review comes in response to a request from the European Commission (EC) to ensure that UCITS rules keep pace with rapid market developments, including the burgeoning crypto sector.

Reevaluating asset inclusion

Since the implementation of the UCITS Eligible Assets Directive in 2007, the landscape of financial instruments has expanded significantly, necessitating a reevaluation of what assets should be accessible for UCITS funds.

These funds are known for their high level of investor protection and are a popular choice among retail and institutional investors across Europe and globally.

The current regulatory framework defines the criteria for assets that UCITS can invest in, with the aim of ensuring liquidity and risk diversification.

However, the rise of digital assets like cryptocurrencies has presented new challenges and opportunities that the existing directives do not specifically address. Digital assets, known for their high volatility and emerging market trends, pose unique risks and potential rewards for investors that need to be regulated appropriately.

Notably, UCITS funds typically revolve around securities, and including crypto could imply that digital assets would be regulated as such in the EU. The watchdog has yet to clarify its stance on the matter.

Consultation process

ESMA’s call for evidence seeks input from stakeholders on how to adapt the UCITS framework to include digital assets, focusing on direct and indirect exposures. 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, open until Aug. 7, will gather feedback from investment firms, consumer advocacy groups, and other financial entities.

ESMA will consider these responses in preparing its technical advice to the Commission, which is expected to address whether and how the scope of eligible assets should be expanded to include crypto and other contemporary investment vehicles.

As the financial markets continue to evolve, the outcome of this review could significantly impact 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 influence how these assets are regulated, balancing innovation with investor protection in the rapidly changing landscape of global finance.