The CBI has issued warnings to consumers about the risks involved in investing in virtual currencies and cryptocurrencies. The dangers associated with such currencies, include their extreme volatility and liquidity, the absence of regulatory protections, the risk of total loss, and the risk of being given incomplete or misleading information.
Digital and crypto related assets are now a new product offering in the securities market and the CBI has seen an increase in queries in relation to whether Undertakings for the Collective Investment in Transferable Securities (“UCITS”) or Alternative Investment Funds (“AIFs”) may be invested, either directly or indirectly, in such assets.
The UCITS is a regulatory framework that permits the management and sale of mutual funds throughout Europe. UCITS compliant funds are perceived as safe and well-regulated investments that are popular among many retail investors looking to invest across Europe. In contrast, an AIF will generally be defined as those funds that do not satisfy the criteria for regulation as UCITS. Examples of AIFs include hedge funds, private equity funds and real estate funds. A Retail Investor AIF is an AIF authorised by the CBI which may be marketed to retail investors.
The CBI must be satisfied that direct or indirect exposure to crypto-assets is capable of being appropriately risk managed. The CBI has stated that it 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.
The CBI has most recently issued guidance in this area in its Securities Markets Risks Outlook Report published on 8 February 2022 wherein the CBI commented as follows:
“At the moment, while such assets may be suitable for wholesale or professional investors, the Central Bank is highly unlikely to approve a UCITS or a Retail Investor AIF proposing any exposure (either direct or indirect) to crypto-assets, taking into account the specific risks attached to crypto-assets and the possibility that appropriate risk assessment could be difficult for a retail investor without a high degree of expertise.”
While other jurisdictions around the world are considering the use of crypto-backed exchange-traded funds and products, the CBI’s position is that cryptocurrencies are a volatile and risky investment and there are too many unanswered concerns in relation to custody and money laundering when it comes to retail crypto investing. The CBI has stated however that this area will be kept under review, and that it will continue to be informed by European regulatory developments regarding cryptocurrencies.
The CBI Securities Markets Risks Outlook Report can be accessed here.
Written by: Maria Curran and Rosie Callan
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