Crypto assets ‘highly unlikely’ to get nod for Irish-based retail funds – Central Bank

Cryptocurrencies will remain off limits for Irish-regulated funds targeting non-professional investors, the Central Bank said on Tuesday.

The bank, which regulates international funds holding more than €4 trillion of assets, said on Tuesday that it is “highly unlikely” to allow such funds to put money into cryptocurrencies, as they remain “highly risky and speculative”.

The comment, contained in the regulator’s second annual Securities Risk Outlook Report, mainly relates to mutual funds known as undertakings for collective investment in transferable securities (Ucits), which are geared towards retail investors and account for about three-quarters of Irish-domiciled funds.

The report said the bank had seen an increase in queries in recent times on whether Ucits and another class of fund, called alternative investment funds (Aifs) – which are mainly aimed at professional investors – can invest in digital or crypto-related assets.

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Currency

The bank said that while such assets may be suitable for wholesale or professional investors, it is “highly unlikely to approve a Ucits or a retail investor Aif proposing any exposure – either direct or indirect – to crypto-assets”. That is because would be difficult for small investors to assess the risk involved, it said.

Bitcoin, the most prominent digital currency, more than doubled in value over the first 11½ months of last year – notwithstanding a sharp sell-off between May and July – to reach an all-time high above $67,000 (€58,620). However, the digital currency subsequently plunged almost 50 per cent, before commencing another rally in late January.

At the peak last November, the wider cryptocurrency market, which also includes the likes of ethereum and dogecoin, was estimated to be worth $3 trillion (€2.6 trillion).

"There are still a lot of questions around what the essence of a [cryptocurrency] is," Patricia Dunne, the Central Bank's director of securities and markets supervision, told The Irish Times. "Is it an asset? Is it a commodity? So, while those dynamics prevail, I do not see our position changing . . . Crypto-assets are still a hugely volatile and risky investment."

The report noted that the wider financial markets “demonstrated resilience” through Covid-19 and Brexit in recent years, aided by central banks pumping extraordinary amounts of money into the system during the pandemic.

Still, Irish-based money market funds suffered investor withdrawals of 10 per cent in March 2020 as companies and banks rushed to grab cash at the height of the Covid-19 global financial shock, the Central Bank previously reported. All the funds were able to meet investor demands.

Indebtedness

The report said that “vulnerabilities remain as increasing levels of indebtedness, stretched asset values and risk-taking behaviour in a search for yield environment have become more prominent”.

Equity and bond markets have turned volatile in recent times as investors fret about the rate at which central banks will withdraw stimulus and increase interest rates to combat a spike in inflation globally.

Ms Dunne said the Central Bank is focused on making sure that investment funds are carefully considering their future liquidity and ability to meet investor withdrawal demands in the event of a financial shock. A fund, for example, could amplify market volatility if it were forced to engage in a fire sale of assets to fund investor withdrawals.