Crypto ETPs and UCITS Eligibility

Mar 2, 2023

Regulatorisches

Neuigkeiten

Krypto

In Short:

Are 21Shares’ ETPs UCITS funds?

21Shares’ ETPs are not UCITS funds. Instead, they are structured as physically backed debt obligations.

Are 21Shares’ ETPs UCITS eligible?

There is no conclusive answer to this question. 21Shares’ analysis of the legal framework suggests that 21Shares’ physically backed cryptocurrency ETPs could be considered eligible investments for UCITS funds. Further information can be found in the assessment below.

What is the difference between UCITS compliant and UCITS eligible?

UCITS compliant products are funds that operate in compliance with the UCITS Regulations. A lot of mutual funds and Exchange Traded Funds (“ETFs”) are designed to be UCITS compliant and carry UCITS in their name.

UCITS eligible refers to whether something can be invested in by a UCITS under the UCITS regulatory framework - specifically the Eligible Assets Directive (“EAD”). The portfolio of a UCITS fund consists of UCITS eligible assets, but these assets do not have to be UCITS funds themselves.

Full Details:

Are 21Shares ETP’s Eligible Assets for UCITS?

The universe of investments a UCITS fund can make is restricted under the UCITS regime by the UCITS Directive¹ and the Eligible Asset Directive², which is often supplemented by local regulator guidance.

According to the UCITS Directive, these investments include but are not limited to: Article 50(1)(a): “transferable securities admitted to or dealt in on a regulated market as defined in Article 4(1)(14) of Directive 2004/39/EC;”

In the case of “Transferable Securities” under Article 50(1)(a), there is a further requirement that the relevant securities do not embed a derivative that refer to an ineligible asset. The following table applies the definition of Transferable Security (according to the EAD, Article 2) to the 21Shares’ ETPs.

Do 21Shares’ ETPs Embed a Derivative?

Article 10(1)(a) of the EAD considers a security to embed a derivative, if: “by virtue of that component some or all of the cash flows that otherwise would be required by the transferable security or approved money-market instrument which functions as host contract can be modified according to a specified interest rate, financial instrument price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, and therefore vary in a way similar to a stand-alone derivative.”

ETPs could be deemed to embed a derivative where their returns are not linear to the assets they track. 21Shares’ ETPs track their underlying assets on a linear basis, as each ETP represents an entitlement to an amount of the relevant cryptocurrency(ies) and once an initial payment has been made upon creation no further investments (e.g.margin transfers) are required. 21Shares therefore believes that its ETPs do not embed derivatives.

The 10% "Trash Bucket"

Even if 21Shares ETPs did not meet the Article 50(1) definition of the UCITS directive, Article 50(2)(a) provides an alternative route for investment of UCITS into ETPs that use cryptocurrencies as their underlyings. It stipulates that a UCITS shall not “invest more than 10 % of its assets in transferable securities or money market instruments other than those referred to in paragraph 1”.

While ESMA’s Opinion³ on Article 50(2)(a) UCITS provides certain limitations on eligible investments for the so-called “trash bucket”, these limitations were not extended to ETPs that use cryptocurrencies as their underlyings. 21Shares’ ETPs may therefore be eligible for investment by a UCITS in this 10% trash ratio.

Conclusion

Our analysis of the Eligible Assets Directive leads us to conclude that 21Shares’ physically backed crypto ETPs are not excluded from UCITS investments. It is our view that 21Shares’ physically backed crypto ETPs are considered Transferable Securities and do not embed derivatives that refer to ineligible assets and are therefore eligible UCITS investments. Even though regulators’ opinions on classification of digital assets across the European Union still varies, the ‘trash bucket’ exception in the UCITS Directive should still allow UCITS funds to have a limited exposure to 21Shares’ physically backed crypto ETPs.

Other Regulatory Guidance

On March 2nd 2020, the Federal Financial Supervisory Authority of Germany (‘BaFin’), classified certain crypto assets as financial instruments.⁴ Based on this definition, cryptocurrency based ETPs can be interpreted in the same way as currency and other ETPs which are generally deemed eligible assets for UCITS.
The Spanish financial regulator, the Comisión Nacional del Mercado de Valores (CNMV), commented that UCITS can have exposure to financial instruments with performance linked to cryptocurrencies, provided the market price of the instrument is determined daily by a third party⁵.
In March 2022, the Commission de Surveillance du Secteur Financier of Luxembourg publication answering frequently asked questions on virtual assets, stated that collective investment schemes (including UCITS) addressing non-professional customers and pension funds are not allowed to invest directly or indirectly in virtual assets⁶.

Disclaimer

This document is not an offer to sell or a solicitation of an offer to buy or subscribe for securities of 21Shares AG (21Shares). Neither this document nor anything contained herein shall form the basis of, or be relied upon in connection with, any offer or commitment whatsoever in any jurisdiction. Nothing contained herein represents investment advice and investors should take their own independent advice.

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(ii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order; or (iii) any other persons to whom this document can be lawfully distributed in circumstances where section 21(1) of the FSMA does not apply.

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21Shares is not an investment advisor and makes no representation regarding the advisability of investing in any such investment product or other investment vehicle. A decision to invest in any such investment product or other investment vehicle should not be made in reliance on any of the statements set forth on this website. Prospective investors are advised to make an investment in any such product or other vehicle only after carefully considering the risks associated with investing in such products, as de-tailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment product or other investment product or vehicle. 21Shares is not a tax advisor. A tax advisor should be consulted to evaluate the impact and consequences of making any particular investment decision. Inclusion of any assets within an index is not a recommendation by 21Shares to buy, sell, or hold such security, nor is it considered to be investment advice. The website materials have been prepared solely for informational purposes based upon information generally available to the public and from sources believed to be reliable. No content contained in these materials (including index data, ratings, credit-related analyses and data, research, valuations, model, software or other application or output therefrom) or any part thereof (“Content”) may be modified, reverse-engineered, reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written per-mission of 21Shares. The Content shall not be used for any unlawful or unauthorized purposes. 21Shares does not guarantee the accuracy, completeness, timeliness or availability of the Content. 21Shares is not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the content. The content is provided on an “as is” basis. 21Shares disclaims any and all express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use, freedom from bugs, software errors or defects, that the content’s functioning will be uninterrupted or that the content will operate with any software or hardware configuration. In no event shall 21Shares be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such damages. Investments into crypto currencies and/or digital assets are subject to material and high risk including the risk of total loss. The calculated prices may not be achieved by investors as the calculated price is based on prices from different trading platforms. Furthermore, an investment into crypto currencies and/or digital assets may become illiquid depending on the trading platform or investment product used for the specific investment. Investors should carefully review all risk factors disclosed by the relevant trading platform or in the product documents of relevant investment products.

¹Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to under-takings for collective investment in transferable securities (UCITS). ²Commission Directive 2007/16/EC of 19 March 2007 implementing Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards the clarification of certain definitions. ³ESMA OPINION Article 50(2)(a) of Directive 2009/65/EC, 12 November 2012. ⁴BaFin Guidance notice, Guidelines concerning the statutory definition of crypto custody business (section 1 (1a) sentence 2 no. 6 of the German Banking Act (Kreditwesengesetz – KWG), 2 March 2020. ⁵Commission de Surveillance du Secteur Financier, FAQ Virtual Assets - Undertakings for collective investment, March 2022. ⁶CNMV Questions and answers, Questions and answers on regulations on CISs, Venture Capital Firms and other collective investment vehicles, 24 May 2022