Will EU be Next to Embrace Crypto ETFs? Future Policy Hangs on Election Outcome
Green candidate Terry Reintke speaks at a campaign event for the European elections in Frankfurt. Photo by Boris Roessler/picture alliance via Getty Images.
Key Takeaways
- Elections for the European Parliament will take place on 6-9 June 2024.
- Their outcome will shape the EU’s future crypto policy.
- This comes as the bloc prepares for a major restructuring of its ETF regulation that could embrace crypto.
When EU voters head to the polls for the bloc’s parliamentary elections next week, crypto policy might not be the most pressing issue on most of their minds. Nevertheless, any significant change in the balance of power could have decisive implications for the fate of the European crypto sector.
One area where the EU parliament could shape outcomes is in the Undertakings for Collective Investment in Transferable Securities (UCITS) directive that determines how member states regulate securities.
What is UCITS?
Initially adopted by the European Economic Community (EEC) in 1985, the UCITS framework predates the modern EU and forms the foundations of the bloc’s investment and securities regulation.
While individual member states have a certain degree of discretion when it comes to governing financial markets, the UCITS Eligible Assets Directive (EAD) establishes a common taxonomy that covers around 75% of all collective investments by retail investors .
Significantly, Exchange-Traded Funds (ETFs) and mutual funds fall under the UCITS umbrella, which up until now, hasn’t provided space for crypto.
Crypto ETPs in the EU
Without a suitable UCITS category, there are only a handful of EU exchange-traded products (ETPs) that hold exposure to spot crypto markets.
Investment vehicles based in Germany and Liechtenstein provide access to crypto in a security wrapper and attracted billions of dollars long before the first spot Bitcoin ETPs landed in the US. But existing non-UCITS products don’t offer the same legal protections as ETFs.7
Looking forward, however, the European Securities and Markets Authority (ESMA) is reviewing the current UCITS designation scheme with a view to introducing a new category for crypto assets.
Although European markets are unlikely to ever attract the same kind of inflows US-listed Bitcoin ETFs have, opening space for crypto within the UCITS regime could pave the way for a far more diverse set of funds.
Rather than each cryptocurrency needing to be approved individually as in the US, an updated directive would likely cover a range of tokens described by the Markets in Crypto Assets (MiCA) regulation.
It would also enable mixed-asset funds that hold a basket of cryptocurrencies or a mix of crypto and other assets. In fact, a diverse portfolio is a prerequisite for all UCITS funds, which are required to place their eggs in different baskets to mitigate the risk of overexposure.
EU Parliament and Crypto Regulation
Any updates to the UCITS framework will require a directive to be approved by the EU parliament. What’s more, with the current ESMA chair Verena Ross’ term set to expire in 2026, MEPs will also be instrumental in shaping the agency’s direction thereafter.
As pointed out by Bitfinex Head of Derivatives Jag Kooner, the European Union’s parliamentary makeup will also shape MiCA implementation and any additional future crypto regulation
“The elections could see a major shift in the political landscape, with right-wing and populist parties expected to gain substantial ground. This shift could influence regulatory stances, potentially leading to more stringent controls or, conversely, more supportive policies depending on the composition of the new parliament,” he said in comments shared with CCN.
Political Groups’ Past Record
In the past, the Greens, Socialists and Democrats (S&D) and the Left in the European Parliament (GUE/NGL) groupings pushed for MiCA provisions that would have curtailed crypto mining on environmental grounds. However, this initiative ultimately failed.
However, with the support of the liberal, centrist Renew Europe party and the eurosceptic European Conservatives and Reformists (ECR), the same alliance secured strong restrictions on privacy coins and anonymous transactions in the regulation. In contrast, the more right-leaning European People’s Party (EPP) and the Identity and Democracy Party (ID) opposed the measures.
Looking ahead to the expected new UCITS directive, there is no indication that any of the major parliamentary forces would block the inclusion of crypto within the EU’s securities framework. However, any lurch to the right would favor a less interventionist regulatory stance.
As in the US, while it is tempting to reduce views on crypto policy to a matter of left versus right or liberal versus conservative, the reality is rarely that simple.
The ECR was instrumental in forcing through MiCA’s travel rule, which all but killed anonymous crypto in the EU. Meanwhile, both S&D and the Greens were divided on the issue, with voices from both parties criticizing the policy.
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