The Central Bank of Ireland, which regulates international funds holding more than 4 trillion euros in assets, said on Tuesday it was ‘highly unlikely’ to allow funds aimed at retail investors to invest in crypto-currencies, because they remain “very risky and speculative”.
The commentary, contained in the regulator’s second annual Securities Risk Outlook Report, relates primarily to mutual funds known as Undertakings for Collective Investment in Transferable Securities (UCIs), which are aimed at investors in retail and represent around three-quarters of funds domiciled in Ireland. .
The report says it has seen an increase in queries lately about whether UCITS and another class of funds, called alternative investment funds (Aifs), which primarily cater to professional investors, can invest in digital or crypto-related assets.
The bank said that while such assets may be suitable for wholesale or professional investors, it is “highly unlikely to approve any UCITS or retail Aif investor offering exposure – direct or indirect – to crypto-assets.” Indeed, it would be difficult for small investors to assess the risk involved, he said.
Bitcoin, the most important digital currency, more than doubled in value in the 11.5 months of last year – despite a strong sell-off between May and July – to hit an all-time high above $67,000 (€58,620). However, the digital currency then fell almost 50%, before starting another rally in late January.
At the height of last November, the broader cryptocurrency market, which also includes Ethereum and Dogecoin, was estimated at $3 trillion.
“There are still many questions about what the essence of a [cryptocurrency] is,” Patricia Dunne, director of markets and securities surveillance at the Central Bank, told The Irish Times. “Is it an asset? Is it a commodity? So as long as these dynamics prevail, I don’t see our position changing. . . Crypto-assets are always an extremely volatile and risky investment.
The report says broader financial markets have “shown resilience” thanks to Covid-19 and Brexit in recent years, helped by central banks which have pumped extraordinary sums into the system during the pandemic.
Yet Ireland-based money market funds (MMFs) suffered investor withdrawals of 10% in March 2020 as companies and banks rushed to grab cash at the height of the global financial shock of Covid-19 , the Central Bank previously reported. All funds were able to meet investor demands.
The report says “vulnerabilities remain as rising debt levels, stretched asset values and risk-taking behaviors in a yield-seeking environment have become more prominent.”
Stock and bond markets have become volatile lately as investors worry about the pace at which central banks will withdraw stimulus and raise interest rates to combat a surge in inflation around the world.
Ms Dunne said the Central Bank is keen to ensure that investment funds carefully consider their future liquidity and ability to meet investor withdrawal requests in the event of a financial shock. A fund, for example, could amplify market volatility if it were forced to sell off assets to finance investor withdrawals.