Investing in crypto - Central Bank of Ireland gives its view

The Central Bank of Ireland (the Central Bank) has confirmed that it is open to considering submissions with regard to investment by a Qualifying Investor Alternative Investment Fund (QIAIF) in crypto assets but that it is "highly unlikely" that UCITS or a Retail Investor Alternative Investment Fund (RIAIF) investing directly or indirectly in crypto assets would be approved.

On 29 July 2021, the Central Bank published updates to its Q&As on UCITS and its Q&As on AIFMD.

The Central Bank's Q&As update concentrated on whether a UCITS, a RIAIF or a QIAIF can invest either directly or indirectly in crypto assets.

The market had been waiting for some time for a steer as to the approach the Central Bank would take. Although the Central Bank’s position is neither positive nor surprising with regard to Irish funds providing access to crypto assets for retail investors, it does at least offer funds and managers some clarification and opens the door a crack for investment in crypto assets by QIAIFs.

With regards to UCITS, the Central Bank must be satisfied that:

• assets in which a UCITS, RIAIF or QIAIF invests are capable of meeting the eligible asset criteria for UCITS; and
• indirect exposure to the assets is capable of being appropriately risk managed.

So far, the Central Bank hasn’t been satisfied that crypto assets satisfy either test and that some crypto assets 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 both for the specific risks that come with crypto assets and the potential that retail investors would be unable to appropriately assess the risks of making an investment in a fund which gives such exposures, the Central Bank has stated that it would be "highly unlikely" to approve a UCITS with direct or indirect exposure to crypto assets. The Central Bank came to the same conclusion with regard to RIAIFs, despite the fact that RIAIFs are not subject to the UCITS asset eligibility.

It would appear that the Central Bank is open to the possibility of a QIAIF investing in crypto assets subject to a submission being made which satisfies the Central Bank that the risks with regard to crypto assets can be appropriately risk managed by the AIFM.

Interestingly, the Central Bank has restricted its comments to crypto assets which are “based on an intangible or non-traditional underlying” rather than to traditional assets (such as financial instruments or commodities) which have been tokenised, which the Central Bank noted may have a different risk profile.

On the face of it, it would therefore appear that the Central Bank is open to investment by UCITS, RIAIFs, and QIAIFs (without a submission) in traditional assets which have been tokenised, although we have sought further clarifications from the Central Bank in this regard.

The Central Bank will be keeping its approach to crypto assets under review. We will report on any change to its stance in the future.