Crypto-Asset Funds in Ireland: The CBI’s Stance
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Bitcoin in the Context of UCITS & AIF
While UCITS operates to restrict the type and diversity of assets that funds can hold and has been interpreted as likely excluding crypto-assets, such as bitcoin, from a UCITS-compliant fund, there does not appear to be any specific restrictions on holding crypto-assets in funds in Ireland.
In October 2021, the Central Bank of Ireland (“CBI”) published an update to its UCITS Q&A. In addressing a question on the permissibility of a UCITS investing in crypto-assets, the CBI’s position is as follows:
“The Central Bank must be satisfied that assets in which a UCITS invests are capable of meeting the eligible asset criteria for UCITS and that indirect exposure to the assets is capable of being appropriately risk managed. As of the date of publication of this Q&A [October 2021], the Central Bank has not seen information which would satisfy it that crypto-assets are capable of meeting the eligible asset criteria for UCITS or that indirect exposure to crypto-assets is capable of being appropriately risk managed. Though crypto-assets do not all have uniform characteristics, the Central Bank has noted that they can present significant risks, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering / terrorist financing risk; and legal and reputation risks.
Taking into account the specific risks attached to crypto-assets and the potential that retail investors will not be able to appropriately assess the risks of making an investment in a fund which gives such exposures, the Central Bank is highly unlikely to approve a UCITS proposing any exposure (either direct or indirect) to crypto assets.”
It is important to note that when the CBI refer to “crypto-assets” in this context they are referring to crypto-assets that are based on an intangible or non-traditional underlying.
It is worth noting that the CBI does not completely close the door on the possibility of approving a UCITS which proposes some exposure to crypto-assets.
This appears to clear up any doubts about the CBI’s position. In the absence of any major developments or radical shifts in policy, the CBI is very unlikely to approve an ETF as being UCITS compliant if it contains crypto-asset exposure.
Helpfully, in the Q&A document, the CBI goes on to state that its approach in relation to crypto-assets will be kept under review, and will continue to be informed by European regulatory discussions on the topic and is subject to change.
Crypto-Asset Exposure and the Irish Qualifying Investor Alternative Investment Fund (“QIAIF”)
The QIAIF is Ireland’s primary alternative investment fund. It is targeted at professional, institutional and high-net-worth individual investors, who must meet minimum subscription requirements as a qualifying investor.
The CBI position as laid out in respect of UCITS is very much consistent with the position that CBI set out on the same topic in the context of AIFMD published some months earlier save for one important difference. In respect of AIFs, the door is ever so slightly more ajar – the CBI’s position being that where a QIAIF is seeking to gain exposure to crypto-assets “the relevant QIAIF would need to make a submission to the Central Bank outlining how the risks associated with such exposures could be managed effectively by the AIFM”.
Again, the CBI makes it clear that its approach in relation to crypto-assets will be kept under review, will be informed by European regulatory discussions on the topic and is subject to change.
Positioning Ireland’s Funds Industry for the Future
Provided the regulatory policy evolves to a sufficient extent, Ireland ought to be well-positioned to become a major player in the area of crypto-asset-tracking funds.
Currently, Ireland is the foremost location within the EU single market for the authorisation of ETFs and is home to well over 50% of all European ETF assets. The maturity of the Irish funds industry ensures that ETF issuers have access to skilled service providers with automated and scalable global models. Ireland also has one of the most developed and favourable tax treaty networks in the world that is beneficial to the domiciliation of funds in Ireland.
Ireland also has the advantage of having a highly regarded and efficient Central Bank of Ireland approval process, which enables sponsors to bring innovative and complex index-tracking products to market more quickly.
Somewhat helpfully, and potentially an early indicator of a slightly more receptive regulatory attitude to crypto than perhaps other regulators around the world, a CBI representative is reported to have stated last year that the CBI was “cognisant of both the important opportunities and material risks associated with crypto-assets”.
In other jurisdictions the different types of ETFs tracking the price of bitcoin have proved popular with investors. As the trading volume, value and acceptance of crypto assets across the globe also increases, it seems clear that investor interest in the crypto asset class is only trending upwards.
The CBI has made clear the unlikelihood of an ETF containing exposure to crypto assets being approved as a UCITS. However, the CBI has indicated that where a QIAIF is seeking to gain exposure to crypto-assets, it is open to receiving a submission from the sponsor outlining how the risks associated with such exposures can be managed.
As ever, the challenge with innovations within the financial services regulation and supervision remains – how to strike the right balance between an appropriate level of regulation without the impact of that regulation unduly hampering the march of progress. A slightly more open and progressive approach could enable Ireland to become a leading jurisdiction in respect of bitcoin-focused ETFs.