EU Trails in Crypto Race Amid Regulatory Delays

Key Takeaway

• ESMA misses the Oct. 31 deadline for crypto fund regulation, risking EU's pace in global crypto oversight compared to the US's $11 billion Bitcoin ETF inflows.
• Ucits funds' €12 trillion assets under review for crypto exposure amid varying national regulations, highlighting inconsistencies within the EU.
• Delayed ESMA report on Eligible Assets Directive expansion now expected by early 2025, as resource constraints hinder timely regulatory updates.

EU Crypto Regulation Delays

The European Union is at risk of lagging in the global race to regulate cryptocurrencies, as the European Securities and Markets Authority (ESMA) struggles with resource constraints. ESMA Chair Verena Ross highlighted the inability to meet the Oct. 31 deadline for advising on the inclusion of crypto assets in certain funds, attributing the delay to the "large number of additional responsibilities" without corresponding resources. This situation underscores the challenges the EU faces in keeping pace with jurisdictions like the US, which has seen over $11 billion in net inflows into Bitcoin ETFs since their approval.

Diverging EU Crypto Policies

The delay in ESMA's recommendations reflects broader inconsistencies within the EU, where member states have adopted varying approaches to crypto regulation. For instance, Ireland prohibits crypto exposure in Ucits funds, while Spain allows investments in crypto exchange-traded products under certain conditions. These discrepancies create confusion among companies and investors, complicating the EU's efforts to establish a unified regulatory framework. The review of the Eligible Assets Directive, crucial for determining the types of assets EU funds can hold, is now expected to be completed by the end of the year or early 2025.

Institutional Crypto Demand Surges

Despite regulatory uncertainties, demand for cryptocurrency exposure among institutional investors has surged, particularly following the US SEC's approval of spot Bitcoin ETFs. This growing interest underscores the increasing integration of crypto assets with traditional financial markets, making the ESMA's review of digital assets in Ucits funds even more critical. The challenge lies in balancing the potential benefits of crypto investments with the risks they pose to retail investors, a task complicated by the ESMA's resource limitations.

Management Quotes

• Verena Ross, Chair of the European Securities and Markets Authority (ESMA):

  "Resources is an issue for ESMA generally because we have had a large number of additional responsibilities and mandates given to us over the last few years, and not always necessarily with a lot of additional resources. That has certainly created some challenges for us." "The main kind of mitigation that we have is to actually rudely and rigorously prioritize, because given the additional mandates and the limited resources, we are not able to do everything all the time to the envisaged timelines."