At the beginning of January 2024, the US Securities and Exchange Commission (SEC) gave the green light to Bitcoin spot ETFs, after only Bitcoin futures ETFs were previously permitted in the USA. In Germany and Europe, however, investors are taking a hard look: Due to EU requirements, Bitcoin ETFs like those in the USA are not allowed here. However, there are other, similar ways to invest in cryptocurrency.
• SEC approves Bitcoin spot ETFs
• European UCITS Directive prescribes a minimum level of diversification for ETFs
• Certificates or ETNs on cryptocurrencies as an alternative for German and European investors
On January 10, 2024, the US Securities and Exchange Commission (SEC) cleared the way for Bitcoin spot ETFs after much hesitation. These ETFs track the current price of the largest cryptocurrency one-to-one by actually buying and holding Bitcoin. Previously, only Bitcoin futures ETFs were permitted in the USA, which do not reflect the spot price, but only the performance of Bitcoin futures, and are not backed by real Bitcoins. With the now approved Bitcoin spot ETFs, institutional and private investors can now invest in the cryptocurrency without having to buy and store it themselves. In addition, as regulated products, ETFs are subject to control by the SEC, as the regulations on investment funds and standards of conduct for fund providers and managers also apply to them, as lawyer Dr. Konrad Uhink writes at “FIN LAW”.
However, according to the lawyer, such Bitcoin spot ETFs would not be possible in Germany. The legal framework in this country – and in Europe as a whole – differs significantly from those in the USA.
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European regulations prevent Bitcoin spot ETFs
The Bitcoin spot ETFs approved in the USA, as their name suggests, invest exclusively in Bitcoin – and that is exactly where the problem lies. “An ETF that only contains one crypto asset – for example Bitcoin – is not allowed to be launched in Germany,” says the website of the Federal Financial Supervisory Authority (BaFin). ETFs in this country always have to invest in several stocks. This is what the European UCITS Directive – short for “Undertakings for Collective Investments in Transferable Securities” – and its German counterpart, the UCITS Directive – short for “Undertakings for Collective Investments in Transferable Securities” – stipulate. They are intended to protect investors from unsuitable financial instruments.
Specifically, according to the UCITS directive, ETFs must have sufficient diversification. As “justETF” writes, none of the individual components of the fund may account for more than 20 percent of the net asset value. Only in exceptional cases can this increase to up to 35 percent. This means that an ETF must contain at least five different values in order for it to comply with European regulations. There is no such requirement in the USA.
Experts disagree: Will the EU follow suit with the Bitcoin ETF?
However, experts are divided on whether the European framework for funds and ETFs could possibly be adjusted in the near future following the US push for Bitcoin ETFs. “In the EU, private customers do not yet have the opportunity to invest indirectly in Bitcoin using an ETF, as is now permitted in the USA. The pressure from market participants on the EU authorities could now increase to attract private customers in the EU “We will also be able to offer ETFs on crypto currencies and thus catch up with the USA,” believes Jochen Kindermann from the law firm Simmons & Simmons, according to “FONDS professional ONLINE”.
However, Jan Altman from the investment house ETC Group sees little chance of adapting the legal framework in Germany and Europe. “I don’t see Bitcoin ETFs coming to Europe. From a regulatory perspective, it’s simply not feasible here. According to the European Securities Directive, I’m not allowed to run a fund that invests in just one asset. Mutual funds are also not allowed to invest directly in crypto at all. That “It’s only possible indirectly through securitization. In my opinion, nothing will change,” he said in an interview with “WirtschaftsWoche.”
Crypto certificates, crypto ETNs and Co.: Investors in Germany have these options
However, German and European investors still have the opportunity to benefit from the performance of Bitcoin without having to hold it themselves – just not via ETFs. The cryptocurrency also serves as a reference value for other financial products. According to BaFin, the range of certificates and financial contracts for difference (CFDs) with crypto assets as an underlying asset is becoming increasingly broader. In addition, there are many design options here, so that investors can also bet on a falling Bitcoin price or leverage their investment.
Another option is to invest in Exchange Traded Notes (ETNs). From a legal perspective, they are downstream Bonds. According to BaFin, they should therefore not be confused with ETFs, but are more similar to a certificate. Nevertheless, crypto ETNs are already quite close to Bitcoin spot ETFs from the USA. According to “justETF”, the Bitcoin ETNs that have been available in this country for several years are often physically secured with the cryptocurrency. However, ETNs do not offer the same security as ETFs because the investors’ invested funds are not part of the special assets of an investment company. If the issuer goes bankrupt, investors’ capital is not protected. However, according to “WeltSparen” there is a right to have the physically deposited assets returned.
As Jochen Kindermann from the law firm Simmons & Simmons stated according to “Fonds professional”, crypto funds are also possible in Europe as alternative investment funds (AIF). “In Germany, an open special AIF with fixed investment conditions can invest up to 20 percent of its net assets in crypto assets,” said the expert. However, these special AIFs are reserved for professional and semi-professional investors. The situation is similar with the Jacobi FT Wilshire Bitcoin ETF, which was launched in September 2023 as the “first Bitcoin spot ETF in Europe”. In order to achieve this, however, it was issued on the English Channel island of Guernsey, which is not a member of the EU but is self-governing. It therefore does not comply with the UCITS guidelines. The Bitcoin ETF can be traded on EURONEXT Amsterdam – but only for institutional and professional investors. According to the fund documents, they must also have a minimum investment amount of $100,000.
Editorial team finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.