The Central Bank of Ireland (the "Central Bank") released an updated AIFMD Q&A on 4 April 2023 which outlines some significant developments regarding the eligibility of digital assets as an asset class for Irish collective investment schemes which are authorised as Qualifying Investor AIFs ("QIAIFs").
BRIEFING
The Central Bank has clarified that "digital assets" for the purpose of the Central Bank requirements are digital assets that are based on an intangible or non-traditional underlying rather than tokenised traditional assets (whose value is linked to an underlying traditional asset or a pool of traditional assets (such as financial instruments or commodities)).
Pursuant to the updated AIFMD Q&A on digital assets, in principle, indirect investment in digital assets is permitted by QIAIFs, subject to a number of qualifications, including that:
- investment by open-ended QIAIFs in digital assets will be limited to 20% of net asset value; and
- investment by limited liquidity or closed-ended QIAIFs in digital assets will be limited to 50% of net asset value.
The Central Bank requires a 'pre-submission' to be made in respect of QIAIFs investing in certain asset classes, which must be cleared by the Central Bank before an application for authorisation of the QIAIF may be filed with the Central Bank for final approval. This Central Bank pre-submission process, which was previously required in respect of all new QIAIFs proposing to invest in crypto-assets, with the sole exception of QIAIFs proposing to invest no more than 10% of net asset value in cash-settled Bitcoin futures traded on the Chicago Mercantile Exchange, will now only be required in the case of new QIAIFs seeking to invest in digital assets in excess of the limits outlined above.
Accordingly, a QIAIF proposing to invest indirectly in digital assets below the limits outlined above may apply for authorisation via the Central Bank's 24-hour approval process, subject to the relevant AIFM satisfying a number of requirements, as set out in the updated AIFMD Q&A on digital assets.
Notwithstanding the fact that the pre-submission process will not apply with respect to indirect investment in digital assets, there will be challenges for AIFMs in satisfying the requirements set out in the AIFMD Q&A, particularly in relation to risk management. The Central Bank has reiterated its view that it considers that the most material risks associated with digital asset investment include liquidity, credit, market, custody, operational, exchange risk, money laundering, legal, reputational and cyber risk. Accordingly, the AIFM must have an effective risk management policy to address all risks relevant to an investment in digital assets. In addition, the AIFM will be required to carry out appropriate stress testing on the proposed indirect investment in digital assets, reflecting the asset price volatility of digital assets including the potential entire loss of value in the investment, and to have an effective liquidity management policy in place.
With respect to direct investment in digital assets, the AIFMD Q&A clarifies that this is not permitted until such time as it is demonstrated to the Central Bank that a depositary can meet its obligations under AIFMD to provide custody or safe-keeping services in respect of digital assets.
Investment in digital assets by UCITS funds
In terms of the eligibility of digital assets in the context of Irish-domiciled UCITS funds, the Central Bank's UCITS Q&A on digital assets was also updated on 4 April 2023 to reflect that the Central Bank has not seen information which would satisfy it that digital assets are capable of meeting the eligible asset criteria for UCITS or that indirect exposure to digital assets is capable of being appropriately risk managed. Accordingly, the Central Bank has indicated that taking into account the specific risks attached to digital assets and the potential that retail investors will not be able to appropriately assess the risks of making an investment in a fund which provides such exposures, the Central Bank is highly unlikely to approve a UCITS proposing any exposure (either direct or indirect) to digital assets.
Similarly, the Central Bank has indicated in the updated AIFMD Q&A on digital assets that it is highly unlikely to approve a Retail Investor AIF proposing any exposure (either direct or indirect) to digital assets.
Future developments
The Central Bank has indicated that its approach in relation to digital assets in Irish regulated investment funds 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.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.
