Digital Assets, MiCA and EU Investment Fund Law

This article is the first of its kind to analyze the legal environment for EU investment funds exposed to digital assets (Digital Asset Funds) in light of the recently adopted Markets in Crypto-assets Regulation (MiCA). Against a regulatory background that mixes existing and novel (or even untested) financial regulation introduced by MiCA, we delineate the scope of the Directive on Undertakings for Collective Investment in Transferable Securities Directive, the Alternative Investment Fund Managers Directive as well as the new MiCA requirements for crypto-asset service providers in the context of Digital Asset Funds.

Prior to MiCA, most investment funds took a careful approach when investing in digital assets; overall exposures to date have been, to the best of our knowledge, quite low. In this article, we seek to answer whether the coming into force of MiCA is likely to increase the exposure of investment funds to digital assets. We find that by increasing legal certainty, MiCA reduces the persuasiveness of the first of two main reasons behind fund managers’ reluctance to invest in digital assets. Yet, the second main reason, operational risk, persists, and is still likely to limit the appetite of traditional service providers for digital assets. This is particularly true for depositaries and custodians where operational risk – prior to and after MiCA’s entry into force – translates into liability risk. In the absence of stable, robust, and resilient depositaries and custodians, digital assets are unlikely to become more attractive for fund investors.

The paper is structured as follows: Pt. I lays out the economic context of Digital Asset Funds; Pt. II provides the basics of EU law on collective investment undertakings; Pt. III shows that Digital Asset Funds can be established in three types of setups and delineates the scope for each of them under UCITSD, AIFMD, as well as a third framework established by the introduction of MiCA, which is essentially a combination of AIFMD and MiCA; Pt. IV discusses MiCA’s new requirements, revealing that liability varies depending on the setup chosen, yet depositaries’ liability is likely to present an obstacle to Digital Asset Funds under all setups. Pt. V concludes.