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EU Considers Crypto Integration Into $12.88 Trillion Market

Europe’s securities regulator, the European Securities and Markets Authority (ESMA), is considering the potential inclusion of crypto assets in the Undertakings for Collective Investment in Transferable Securities (UCITS) Eligible Assets Directive (EAD). This move could open up a massive investment market valued at around €12 trillion ($12.88 trillion).

ESMA recently launched a Call for Evidence to gather input from stakeholders on the feasibility and impact of allowing UCITS to incorporate cryptocurrencies. The UCITS framework plays a significant role in EU retail investment, representing about 75% of all retail investment in collective funds in the region.

The review by ESMA aims to address the changing financial landscape, where the range of financial instruments has expanded significantly since the establishment of the UCITS framework nearly two decades ago. This has led to uncertainties in determining asset eligibility, resulting in varying interpretations and applications of the directive across EU member states.

Experts like financial regulation specialist Sean Tuffy believe that the inclusion of cryptocurrencies in UCITS could be a game-changer, potentially transforming the investment landscape and offering a new avenue for portfolio diversification and returns.

The Call for Evidence targets a wide audience, including investors, consumer groups, UCITS management companies, and trade associations, to gather insights on market practices and practical application concerns related to the UCITS EAD. One key focus area is aligning key notions and definitions with other EU legislation to ensure smooth integration of new asset classes like cryptocurrencies.

While there are potential benefits to including cryptocurrencies in UCITS, such as enhanced portfolio diversification, there are also challenges, like coordinating custody regulations with the EU’s upcoming Markets in Crypto-Assets regulation (MiCA). This regulation will establish strict rules for asset segregation and safekeeping, essential for custody of crypto assets.

The potential inclusion of cryptocurrencies in UCITS comes at a time when other major economies like the US and Hong Kong are integrating crypto assets into financial products, such as Bitcoin ETFs, attracting significant investment inflows into the sector.

The consultation process by ESMA is set to conclude on August 7, 2024, after which the regulator will compile feedback to develop technical advice for the European Commission. This advice will play a crucial role in determining whether cryptocurrencies will be included in the UCITS framework, potentially ushering in a new era for crypto investment in Europe.

As of the latest data, the total crypto market cap stands at $2.202 trillion.

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