Chapter 6 : Digital asset regulation
components with highly correlated performance as distinct assets .
“ Given the focus on costs , fees and expenses in a UCITS product , there is also a question as to whether the roll costs on the trading activity would be seen as a viable solution ,” Coveney added . “ Given the costs involved there is also the potential to have tracking error and a wide divergence in the performance of the crypto bucket that is being tracked .”
Setting a pure crypto basket UCITS ETF aside , a more tenuous
approach could be crypto making up a small part of an exotic commodity basket .
Lansing said such a concept would be more likely than a crypto-only basket , but regulators would still need to be satisfied with risk spreading . Even then , he said this option would be less popular with investors , would likely be a German-only play and is still “ some way off ”.
“ A lot of the larger players do not have German UCITS funds and the white-label opportunities are
also mostly based in places like Luxembourg and Ireland ,” he warned .
Still a waiting game
Lansing concluded it will take Irish and Luxembourg regulators to soften their stances for crypto exposure to grow to the point where they view the asset as tried and tested enough to appear in UCITS format . At best , he suggested this is “ a year of two away probably ” but added crypto will never be included in the
European Commission ’ s eligible asset directive , given gold is not even deemed an eligible asset yet .
While Lansing believes crypto ’ s best chance of UCITS ETF inclusion is via a diversified index , he said even a 5 % exposure to crypto would be “ challenging ”.
Bradley Duke , co-founder and co-CEO of crypto issuer ETC Group , agreed , stating his firm ’ s focus would remain on other opportunities outside of UCITS . “ With UCITS concentration rules being what they are , it really comes down to the level of discretion individual regulators are prepared to flex ,” Duke told v . “ We , at present , are not looking to go down this road because of this uncertainty and the fact that we have many other irons in the fire .”
Some had hoped the European Parliament ’ s provisional agreement on the regulation on markets in crypto assets ( MiCA ) might have impacted the stance of UCITS , however , many regulators still do not treat crypto as an eligible ‘ financial instrument ’, which is a key consideration for UCITS .
In a paper published in July , Dechert said : “ MiCA does not have an impact for UCITS , as UCITS are generally restricted from investing in assets that do not qualify as financial instruments .
“ It will have to be seen whether the Distributed Ledger Technology ( DLT ) Pilot Regime Regulation will make it easier for UCITS to invest in crypto assets qualifying as an eligible financial instrument under the UCITS Directive and becoming investable for a UCITS because they are traded and settled in accordance with the DLT Pilot Regime Regulation .”
While favourable treatment of crypto across UCITS might be some time away , in the meantime , regulators in individual countries might look to develop more distinct positions to corner themselves a market in the asset class – as Guernsey did with Jacobi ’ s PCC arrangement .
Such divergence carries the risk of greater complexity and more workarounds , which ultimately go against the UCITS goals of greater transparency and investor protection .
Jamie Gordon is a reporter at ETF Stream
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