In a breakthrough development for the Irish funds industry, the Central Bank of Ireland (CBI) recently granted permission for Irish regulated funds to take exposure to crypto-assets. Specifically, the approval enables two Qualifying Investor AIFs (a category of alternative investment fund which is restricted to professional investors) to obtain indirect exposure to bitcoin, by acquiring cash-settled bitcoin futures which are listed on the Chicago Mercantile Exchange.
This is the first approval of its kind since the CBI published guidance in August 2021 outlining its general policy approach to crypto assets. That guidance provided that in light of the risks associated with crypto assets and the potential that retail investors may not be able to appropriately assess the risks of investing in a fund which gives such exposure, the CBI was highly unlikely to approve an Irish Ucits or Retail Investor AIF to take any exposure to crypto assets.
Conversely, the guidance provided that the CBI was open to case-by-case applications for Qualifying Investor AIFs to gain exposure to crypto-assets (in light of the professional investor base and minimum €100,000 initial investment for such products).The CBI's stated key focus would be on assessing how the relevant alternative investment fund manager (AIFM) would effectively manage the main risks associated with such exposures, in particular liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering/terrorist financing risk; and legal and reputation risks.
Positive step
Accordingly, the application involved extensive bilateral engagement between the CBI and the AIFM in question to address these risk management concerns before approval would be granted. And while that initial permitted exposure is relatively conservative (limited to indirect, cash-settled exposure, and to a small proportion of the funds' overall assets), this is nonetheless an extremely positive step forward for the Irish alternative funds industry. It demonstrates that the regulatory process is transparent but also effective, and it paves the way for other crypto-asset permissions to follow.
The Irish approach follows and should be viewed in the context of similar recent positive and permissive regulatory/legislative initiatives in other key financial centres such as Luxembourg, Germany, Switzerland, the United Kingdom and the United States, which are adapting their regulatory regimes to facilitate the significant institutional investor demand for digital assets.
The CBI has likewise made it clear that its approach to crypto assets will be kept under review; will continue to be informed by European regulatory discussions on the topic (such as the proposed Markets in Crypto-Assets regulation, which aims to create a regulated framework for crypto assets); and may change should new information or developments emerge in the future.
The Irish funds industry is therefore optimistic that in time, this approval will be seen as merely the first step on the path to more widespread accommodation of this exciting and innovative new asset class within Irish funds.
