Crypto Unlocked: In the bleak midwinter - Page 33

If you look at things like 5-10- 40 , 20 % limit in a diversified index , you can do a derivative on a diversified index .
Chapter 6 : Digital asset regulation
Surveillance du Secteur Financier ( CSSF ) said under its 2004 antimoney laundering and terrorist financing law , an entity investing in crypto “ is not suitable for all kind of investors ” and “ UCITS , UCIs addressing non-professional customers and pension funds are thus not allowed to invest directly or indirectly in virtual assets ”.
Shane Coveney , partner at law firm Dillan Eustace , said Irish regulators are not satisfied that issuers can risk manage crypto exposures suitably to meet UCITS standards .
Coveney told ETF Stream : “ The Central Bank of Ireland ( CBI ) has noted that such exposure can present significant risks including liquidity risk , credit risk , market risk , operational risk ( including fraud and cyber risks ), money laundering and terrorist financing risk , and legal and reputation risks . “ In assessing the suitability of

If you look at things like 5-10- 40 , 20 % limit in a diversified index , you can do a derivative on a diversified index .
such a product for a retail investor base , the CBI ’ s view is that retail investors would need to be able to appropriately assess the risks of making an investment in a fund which gives such exposures , something which has not been shown sufficiently to meet its requirements .”
However , other bodies take a more lenient view . In a report published last June , WisdomTree noted the Spanish financial regulator , the Comisión Nacional del Mercado de Valores ( CNMV ), said if collective investment schemes are UCITS or equivalent , they can have exposure to financial instruments with performance linked to cryptocurrencies , provided they do not embed derivatives such as ETNs .
More significantly in the context of ETPs , the German regulator BaFin allows UCITS funds to buy crypto ETNs on the delta one exception on transferable securities and based on the same rationale as allowing funds to access gold via exchange-traded commodities ( ETCs ), CoinShares ’ Lansing told ETF Stream .
“ BaFin states you can get exposure via ETPs as long as they are delta one and they trade on exchange , so called transferrable securities ,” Lansing said . “ However , for funds trying to buy ETPs , BaFin is asking them to explain how the more qualitative obligations – risk diversification , risk spreading , risk management – which are implicit within UCITS regulation rather than hard and fast and quantitative , are being done .”
Can crypto use the same backdoor as commodities ?
Naturally , some might then question why regulators would allow UCITS funds to invest in crypto or even crypto ETNs but not allow crypto in UCITS ETFs .
One response may be that crypto exposure would need to meet UCITS diversification rules , however , crypto basket ETNs already exist . If other assets such as gold are ineligible on their own but are allowed into UCITS ETFs when part of a diversified commodities product , should a diversified crypto index not receive the same treatment ?
CoinShares ’ Lansing argued : “ The point that a diversified crypto index should be treated like a diversified commodity index under UCITS is 100 % correct under the quantitative rules of UCITS .
“ If you look at things like 5-10- 40 , 20 % limit in a diversified index , you can do a derivative on a diversified index .”
However , Lansing admitted the key regulators are unlikely to take this view and even BaFin would be mindful of risk diversification , spreading and management .
Coveney added the CBI would question the availability of centrally cleared and exchangetraded futures on the assets making up a diversified crypto index and would not view