Is there a Bitcoin ETF in Europe? What is the applicable regulatory framework for such an investment tool? Let’s take a look at the meaning of the term “Bitcoin ETF” in Europe, in particular on the importance of the regulations behind an ETF.
What is an ETF?
Understanding ETFs and their regulations in Europe
ETFs or Exchange-Traded Funds are funds that work much like traditional funds. ETFs offer exposure to a wide variety of asset classes and niche markets, but are, unlike traditional funds, particularly easy to access for individual investors. Indeed, ETFs are traded on the stock exchange and quoted continuously.
To be more specific, one of the main differences between a traditional fund and an ETF is that ETFs can be bought or sold continuously during the daysuch as shares, while traditional funds can only be purchased once a day or a week on the basis of the net asset value (NAV or “Net Asset Value”).
In addition, investing in a traditional fund sometimes imposes a minimum amount as well as generally higher fees.
The specific framework of UCITS (also called UCITS funds)
In Europe, ETFs are heavily regulated by the European framework of the Directive UCITS IV : Undertakings for Collective Investment in Transferable Securities (UCITS IV in English). European ETFs are thus subject to a spectrum of regulations, ranging from rules regarding their establishment and day-to-day operations to rules governing their marketing and distribution.
The UCITS framework constitutes a regulatory framework unique designed above all to protect the interests of investors in Europe.
Indeed, under the UCITS Directive, ETFs are subject to well-defined requirements, including:
clear investment guidelines (and in particular the impossibility of investing in unregulated products);
diversification ratios ;
rigorous management of risks and investment limits;
transparency of information ;
the use of an independent custodian bank.
The use of an independent custodian is particularly important, as it ensures that the fund’s assets cannot be seized to pay creditors of the asset manager, in the event of financial difficulties. Clearly, in the event of the manager’s bankruptcy, clients are guaranteed to recover their assets. It is also prohibited for a depositary (or its delegate) to reuse for its own account the assets it holds in deposit.
It is also important to note that:
the very strict regulatory framework that is the UCITS framework is the highest standard in terms of regulations for a fund in Europe; being UCITS is a necessary condition for a fund to be eligible for the main investment envelopes in Europe, including Life Insurance or the Retirement Savings Plan in France; Although initially put in place to protect European investors, the UCITS framework, being one of the most solid and strict frameworks in the world, is also acclaimed by Asian and South American investors.
Types of ETFs and Investment Styles
ETFs can be actively or passively managed, in the first case a portfolio manager actively makes decisions, while in the second case the strategy is simply to follow a more or less complex index.
ETFs make it possible in particular to isolate and monitor an identified market niche. For example, thematic ETFs aim to identify long-term transformational trends (“megatrends”) and investments that are likely to profit from them if they materialize…as in the case of the crypto industry.
Why focus on a megatrend? Rather than focusing on specific companies or sectors, thematic investing aims to predict long-term trends in the market.
Therefore, in a single transaction, investors have the opportunity to capture the potential of one or more themes / megatrends that may change or be the source of a new industry. This is a tool to easily customize any wallet and to become an additional source of diversification.
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Can you invest in a Bitcoin ETF?
Investors now have more ways than ever to invest in Bitcoin. Besides buying bitcoin directly, investors are also looking for other ways from traditional finance to gain exposure to bitcoin.
Despite the recent difficult environment for cryptocurrencies, interest in bitcoin and the blockchain economy continues to grow, and the options for investing in the bitcoin ecosystem continue to multiply.
For Bitcoin, the first initiatives came from ETCs and ETNs.
Exchange Traded Certificates (ETC) and Exchange Traded Notes (ETN)
ETCs and ETNs are debt securities traded on an exchange. The issuers of these debt securities (eg investment banks) undertake to pay the return of the underlying index.
Many contracts and notes exist around Bitcoin, however, they can present a high counterparty risk, and do not follow UCITS regulations and therefore are not necessarily available in securities accounts and life insurance.
What about the ETF side?
Bitcoin ETFs (Exchange Traded Funds)
Given the higher degree of protection and transparency, the demand is very strong, but the subject is more complex. Indeed, as explained in the first part, an Exchange-Trade Fund (ETF) is necessarily a UCITS fund, which imposes certain constraints.
The UCITS framework imposes in particular a diversification of assets, hence the impossibility today of finding a pure Bitcoin ETF in Europe…
However, Melanion Capital has set up a thematic Bitcoin ETF which is the first UCITS fund of its kind in the world.
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What does the UCITS framework add to a Bitcoin ETF?
Security : a UCITS ETF has several levels of security. It must be traded on a market authorized and regulated by a European regulator (such as the AMF) and comply with all the rules of the UCITS directive.
Simplicity : No cryptocurrency wallets, offshore entities, hack-prone exchanges, or minimum investment amounts.
Minimal counterparty risk : the assets are held by an independent, regulated entity and not by the investment manager.
Eligibility for traditional investment envelopes tax-efficient such as life insurance and retirement plans.
Are there ways today to reconcile UCITS, ETFs and Bitcoin?
The answer is yes. Melanion Capital has created the world’s first Bitcoin-themed UCITS ETF.
How was this possible? Melanion Capital has created a unique and innovative methodology to maximize exposure to any given benchmark through equities.
This methodology consists of weighting the shares according to their Beta (sensitivity) in relation to the benchmark index in an attempt to follow it as faithfully as possible. Melanion applied this methodology to Bitcoin to launch its ETF: the Melanion BTC Equities Universe UCITS ETF.
A detailed presentation of this ETF and its methodology will be the subject of a future article.
This article was written by Cyril Sabbagh, Managing Director at Melanion Capital and designer of this ETF
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