On 29 July 2021, the Central Bank of Ireland (CBI) issued an updated UCITS Q&A and AIFMD Q&A, which set out the CBI’s current position with respect to qualifying investor alternative investment funds (QIAIFs), retail investor alternative investment funds (RIAIFs) and Undertakings for Collective Investment in Transferable Securities (UCITS) gaining exposure - directly or indirectly - to crypto-assets.
The CBI UCITS and AIFMD Q&A highlight that crypto-assets are generally considered to be private digital assets that depend primarily on cryptography and distributed ledger or similar technology, but that the nature and characteristics of crypto-assets vary considerably. For example, crypto-assets which are tokenised traditional assets (whose value is linked to an underlying traditional asset or a pool of traditional assets (such as financial instruments or commodities)) may have a different risk profile when compared to other crypto-assets that are based on an intangible or non-traditional underlying. For the purposes of the CBI UCITS and AIFMD Q&A the term “crypto-asset” is used to refer to the latter type of crypto-asset.
The CBI is concerned that crypto-assets 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. In particular, the CBI is concerned that retail investors will not be able to appropriately assess the risks of making an investment in a fund which is exposed to crypto-assets.
Through the updated CBI UCITS and AIFMD Q&A, the CBI indicates that it is not currently satisfied that direct or indirect exposure to crypto-assets are capable of being appropriately risk managed in the context of a QIAIF or a RIAIF. Furthermore, the CBI has indicated that it is not satisfied, in the context of UCITS products, that crypto-assets are capable of meeting the eligible asset criteria for UCITS and that indirect exposure to crypto-assets is capable of being appropriately risk managed.
Taking into account the specific risks attached to crypto-assets, in particular for retail investors, the CBI has indicated that, at present, it is “highly unlikely” to approve a RIAIF or UCITS proposing any exposure (either direct or indirect) to crypto assets.
The CBI has indicated in the case of QIAIFs (which funds are aimed at professional investors) seeking to gain exposure to crypto-assets, that a submission may be made to the CBI in relation to any exposure to crypto assets. The alternative investment fund manager (“AIFM”) to the QIAIF would need to be able to demonstrate to the satisfaction of the CBI how the risks associated with exposure to crypto-assets can be effectively managed by the AIFM.
As this is a continuously evolving area, the CBI has stated that its “approach in relation to crypto-assets will be kept under review, continue to be informed by European regulatory discussions on the topic and may change should new information or developments emerge in the future.”
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