No Bitcoin ETF for Europe, but Europe still leads in diversified crypto investments

The SEC has previously approved many spot Bitcoin ETFs in the United States; however, these ETFs are not permitted in the EU due to stringent requirements. Instead, there are other, safer ways to invest in cryptocurrency. After years of anticipation and more than 20 failed applications, the US Securities and Exchange Commission has approved a wave of spot Bitcoin BTC exchange-traded funds (ETFs) for trading on American stock exchanges.  

These ETFs directly purchase and hold Bitcoin, the world’s leading cryptocurrency, and track its price one-to-one. Previously, only Bitcoin futures ETFs were offered in the United States. These monitor the performance of Bitcoin futures contracts rather than the cryptocurrency’s actual price, and they contain no real Bitcoin.

The newly approved spot ETFs provide institutional and ordinary investors with a regulated and accessible option to obtain exposure to Bitcoin without having to buy and store it directly. As regulated products, these ETFs are subject to SEC regulation and must follow the same investment fund laws and codes of conduct as fund providers and managers. But what does this certification mean for the potential of a Bitcoin ETF in Europe? Are financial regulators in the European Union prepared to follow suit, or will EU investors have to wait longer?

ETNs offer familiar route, but challenges remain

The European landscape for obtaining Bitcoin and other cryptocurrencies remains somewhat difficult for investors. Retail trading and investment platforms like Bison, Bitpanda, and eToro provide easy entry points, but their appeal to larger investors or those looking for traditional frameworks is restricted.

According to the Undertakings for Collective Investment in Transferable Securities (UCITS) legislation, an ETF that invests solely in Bitcoin — and hence in only one asset — will not be permitted in Europe. One of the objectives of this directive is to protect investors from complete financial loss. These security measures also demand that European fund products be diverse and not overly focused on a single asset class or product. 

In Europe, for example, Bitcoin exchange-traded notes (ETNs) fall under the same category as ETFs, namely exchange-traded products (ETPs), and are frequently backed by “physical” Bitcoin.

Several European financial firms, including 21Shares, VanEck, ETC Group, and Deutsche Digital Assets (DDA), provide alternative Bitcoin investments in the form of ETNs. According to Dominik Poiger, chief product officer of Deutsche Digital Assets GmbH, one obvious advantage of ETNs is that they are easily traded on exchanges such as Deutsche Börse’s Xetra, Euronext Amsterdam, and SIX Swiss Exchange, and investors are already familiar with the concept of exchange-traded products. 

“These items are then visible in the securities account as allocations, making them easily used for portfolio diversification. The wrapper of the fully secured debt asset is also well known to commodities investors — for example, Xetra gold — so one is entering familiar ground,” he explained. To address this risk, several companies have incorporated a variety of security safeguards, including regulated cryptocurrency custodians, independent security trustees, and internal governance procedures.

According to Ophelia Snyder, co-founder and president of 21Share, the distinctions between ETFs and ETNs are mostly irrelevant provided the product structure (spot price, physical collateralization) is acceptable.

For example, depositing collateralized assets with an independent custodian reduces the issuer’s possible default risk on a 21Shares ETP. As a financial instrument listed on regulated stock exchanges, European investors can easily purchase and sell crypto-asset ETNs on the secondary market at the exchange’s current market price or over the counter, just as they would with stocks or ETFs. Some financial institutions can provide institutional investors with specific Alternative Investment Funds (AIFs). The EU’s UCITS Directive does not regulate such funds.

They include hedge funds, private equity funds, real estate funds, and numerous other institutional institutions. AIFs can invest directly in cryptocurrencies, such as the HAIC Crypto Native Advanced Select offered by the German private bank Hauck Aufhäuser Lampe Privatbank AG. 

Will Bitcoin ETFs be approved in the Europe in the future?

Poiger does not anticipate Bitcoin ETFs coming to Europe in this single-asset form as they have in the United States. According to the relevant EU directives, crypto-assets, like gold or other commodities, are not UCITS-eligible assets, and “even if the EU changed its rules and crypto assets were allowed to be bought directly in UCITS funds, they would still have to comply with the diversification rules of a UCITS.”

“So, it is very unlikely that there will ever be a pure Bitcoin UCITS ETF in Europe, but it is conceivable, albeit very unlikely, that a basket of cryptocurrencies would be approved as a UCITS fund.” Simon Seiter, head of digital assets at Hauck Aufhäuser Lampe, told Cointelegraph that a cryptocurrency-based ETF

 However, this would necessitate the creation of recognised crypto indexes that meet UCITS standards. These might then serve as the foundation for the ETF, much like specific equity indexes are used as the foundation for traditional stock ETFs today.

“Under these circumstances, I don’t see the need for regulatory changes. In my opinion, whether UCITS funds should be opened up to single-asset ETFs extends beyond the crypto sector. If it becomes viable to issue crypto ETFs that meet UCITS rules, I believe there will be a market for such securities. This would allow retail clients to remain in their current custody arrangements while diversely investing in cryptocurrencies,” he said.

Europe leads in diversified crypto investment options

Poiger believes that cryptocurrencies, particularly Bitcoin, are becoming a major asset class, as indicated by the recent establishment of a Bitcoin ETF in the United States. “Crypto assets will become increasingly important for investors seeking diversification. We frequently assess the impact of adding Bitcoin to a standard portfolio (0.5%-2%), and have discovered that such an allocation improves performance while also enhancing the risk-return profile, including volatility, Sharpe ratio, and maximum drawdown.”

Snyder stated that there are currently other avenues to invest in Bitcoin and cryptocurrency in general in Europe, so EU investors should not be concerned about the lack of a Bitcoin ETF in place. 21Shares alone offers about 40 products across eight EU nations, including indices, single asset products, liquid staking products, and shorts, all of which are entirely backed by physical spot crypto assets. In addition, these items are listed on exchanges such as SIX and Xetra in several currencies. “Europe is well ahead of the U.S. in offering retail and institutional investors regulated access to crypto in an ETN/ETF wrapper,” Snyder said, adding that cryptocurrencies are in great demand in Europe as investors perceive the value and possibilities in the asset class.

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