Alternative investment funds investing in cryptoassets

Collective investment is an area of the financial sector, it can be argued, that has been less affected by the impact of new legislation on crypto-assets, such as the MiCA Regulation or the DLT Regulation. However, this does not mean that crypto-assets are unrelated to collective investment. Crypto-assets (i) can be an investment asset that collective investment undertakings acquire for their portfolios; (ii) can represent a monetisable value that is collected as an investment by collective investment undertakings; and (iii) can be issued by collective investment undertakings, in the case of so-called “tokenised funds”. In this article, we focus on crypto-assets as an investment asset for alternative investment funds.

From a legislative perspective, collective investment undertakings can be divided into two broad groups:

• an undertaking for collective investment in transferable securities (UCITS funds); and
• alternative investment funds (AIFs).

The main distinguishing feature of these two is their investment policy. In general, AIFs are those collective investment undertakings that do not qualify as UCITS funds.

Legislation on alternative investment funds

The AIFMD[1] is the basic regulation for AIFs. AIFs cover a much larger group of collective investment vehicles than UCITS funds, including, investment funds potentially investing in crypto-assets. While the UCITS Directive[2] is a relatively coherent harmonised regime for UCITS funds, the AIFMD mainly sets out requirements and conditions for AIF managers (management companies), while AIFs themselves are defined only generally, as collective investment undertakings which raise capital from a number of investors, with a view to investing it for the benefit of those investors, in accordance with a defined investment policy, and which do not require authorisation under Article 5 of the UCITS Directive. The investment policy of AIFs is, with some exceptions, not harmonised and different Member States may legislate for different types of AIFs.

EU law specifically addresses 4 different types of AIFs, which differ in their investment policy:

• European Long-Term Investment Funds (ELTIFs);
• European Venture Capital Funds (EuVECA);
• European Social Entrepreneurship Funds (EuSEFs); and
• Money Market Funds (MMFs)[3].

The extent to which these AIFs can invest in crypto-assets varies. This topic was covered at our crypto-assets conference. A recording of the conference is available here:

What is ELTIF’s investment policy?

ELTIFs are AIFs, regulated by the ELTIF Regulation[4], whose purpose is to support the real economy of the EU. ELTIFs have a broad investment policy and may invest in (i) “real assets”, comprising communications, environmental, energy, or transport infrastructure, social infrastructure (nursing homes, hospitals), industrial equipment, intellectual property, vessels, machinery, aircraft, housing, investments in water rights, forests, construction, and minerals, and (ii) “qualified portfolio undertakings”, i.e. undertakings which are generally not financial undertakings (with certain exceptions), and are not traded on a regulated market or a multilateral trading facility (“MTF“) (except where the market capitalisation of such undertakings is EUR 1.5 billion or less) and which are domiciled in the EU or in a third country not considered high risk or non-cooperative for tax purposes. An ELTIF is required to invest at least 55% of its capital in eligible investment assets, as defined in the preceding sentence.[5] No more than 45% of its capital may be invested in highly liquid assets, as per Article 50(1) of the UCITS Directive.

Can ELTIFs invest in crypto-assets?

ELTIFs are much more likely to be exposed (if at all) to crypto-assets indirectly. On the one hand, ELTIFs may invest in eligible investment assets that do not explicitly include crypto-assets. While there is a broad group of real assets within eligible investment assets defined only as assets that have intrinsic value by virtue of their nature and characteristics[6], it is also clear from Recital 8 of the ELTIF Regulation that eligible investment assets should be understood to exclude assets that do not themselves represent long-term investments in the real economy. Based on the definition of other eligible investment assets, we are of the view that cryptoassets are not eligible investment assets for the purposes of the ELTIF Regulation. However, it should be noted that eligible investment assets also include debt instruments issued by a qualifying portfolio undertaking or units or shares of one or more other ELTIFs, EuVECAs, EuSEFs, UCITS funds, and EU AIFs. The ELTIF Regulation does not preclude, for example, bonds or shares, as referred to in the previous sentence, from being issued as tokenised securities. At the same time, indirect exposure of ELTIFs to cryptoassets may occur through qualifying portfolio undertakings where investments in cryptoassets are not per se excluded. In addition to eligible investment assets, ELTIFs may only invest in assets under Article 50(1) of the UCITS Directive, where the scope of investment in crypto-assets is significantly more limited, if not absent.

What is EuVECA’s investment policy?

EuVECAs are AIFs, regulated by the EuVECA Regulation[7], whose purpose is to provide financing to undertakings that are generally very small, in the early stages of their corporate existence, and that show strong potential for growth and expansion. EuVECAs are required to invest at least 70% of their total capital contributions and uncalled committed capital in assets that are “qualifying investments”. Qualifying investments are:

• equity and quasi-equity investments in so-called qualifying portfolio undertakings not admitted to trading on a regulated market or MTF and employ fewer than 500 employees, or are listed on an SME growth market within the meaning of MiFID II[10]which are not themselves collective investment undertakings or designated financial institutions and which are domiciled in the territory of the EU or in cooperating countries that comply with the standards envisaged by Article 26 of the OECD Model Tax Treaty,
• loans to such qualified portfolio undertakings,
• shares of a qualifying portfolio undertaking acquired from existing shareholders of that undertaking, and
• investments in other EuVECAs, provided that they do not invest more than 10 % of their capital in other EuVECAs.

EuVECA may invest less than 30% of its capital in other assets, without any statutory limitation as to type of such assets.

What is EuSEF’s investment policy?

EuSEFs are AIFs regulated by the EuSEF Regulation[11], which are collective investment vehicles focused on investing in social enterprises. EuSEFs are required to invest at least 70% of their total capital contributions and uncommitted capital in so-called “qualifying investments”. [12] Qualifying investments are:

• equity and quasi-equity investments in so-called qualified portfolio undertakings which are not admitted to trading on a regulated market or MTF, aim to achieve measurable positive social impacts, use their profits primarily to achieve their primary social objective, are managed responsibly and transparently, and are domiciled in the EU or in cooperating countries, which comply with the standards envisaged by Article 26 of the OECD Model Tax Treaty,
• loans to qualified portfolio undertakings,
• securitised and non-securitised debt instruments issued by a qualified portfolio undertaking,
• investments in other EuSEFs, provided that the latter do not invest more than 10% of their capital in other EuSEFs, and
• any other type of participation in a qualifying portfolio undertaking.

As with EuVECAs, EuSEFs may invest the remaining less than 30% of their capital in assets other than qualifying investments.

Can EuVECA and EuSEF invest in cryptoassets?

In the case of EuVECA and EuSEF, it is possible that their investment policy allows them to invest in crypto-assets, even directly, to the extent that they do not have to invest in qualifying assets. The broad definition of qualifying assets and qualifying portfolio undertakings in the relevant regulations does not preclude, for example, these qualifying portfolio undertakings having some exposure to crypto-assets, or their business activities also being directly related to crypto-assets (less likely in the case of EuSEFs). Thus, ultimately, these AIFs could not only have direct exposure to crypto-assets outside of investments in qualifying assets, but also indirectly through investments in qualifying assets. Moreover, neither the EuVECA Regulation nor the EuSEF Regulation provides for any rules and limits on risk limitation and spreading. Therefore, the only limitation on the acquisition of crypto-assets (and their total share in the portfolio of these collective investment undertakings), apart from the percentage limit on qualifying investments, will be the investment policy set out in their constituent documents.

What is the MMF’s investment policy?

These may be UCITS funds or AIFs, which are regulated by the MMF Regulation[13]. MMFs may invest only in short-term financial assets with a residual maturity not exceeding 2 years[14]. These collective investment undertakings have distinct or cumulative objectives offering returns in line with money market rates or preserving the value of the investment[15]. The investment policy of MMFs is more strictly defined than, for example, ELTIFs, EuVECAs, or EuSEFs, as MMFs may only invest in one or more of the financial assets listed in Article 9 of the MMF Regulation, including: money market instruments, deposits with credit institutions, derivatives of financial instruments, or units or shares of other MMFs. The purpose of the MMF is to address short-term liquidity problems within the financial market and thereby help prevent systemic risks from materialising.

Can MMF Invest in Crypto Assets?

MMFs established as AIFs have a strict investment policy that makes it virtually impossible for them to be exposed to crypto-assets. For MMFs to invest in crypto-assets, said crypto-assets would have to qualify as one of the permissible assets listed in Article 9 of the MMF Regulations. In such a case, crypto-assets that are tokenised financial instruments or, for example, electronic money tokens, which under the MiCA Regulation are [16] electronic money, come into consideration.

If you are interested in this topic, please do not hesitate to contact us:

• Peter Varga, e-mail: peter.varga@highgate.sk
• Roman Baranec, e-mail: roman.baranec@highgate.sk

For more on the legal, tax, and accounting regulation of cryptoassets, see this section of our website: crypto and legal and tax structures

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Alternatively, you can address your specific questions in a consultation with our partner Peter Varga, who specializes in financial regulation (including crypto-assets) and tax law. You can book a consultation here:

[1] Directive 2011/61/EU of the European Parliament and of the Council of 8. June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulation (EC) No. 1060/2009 and (EU) No. 1095/2010 (hereinafter referred to as “AIFMD“)

[2] Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS Directive)

[3] These investment funds may also be UCITS funds

[4] Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European Long-Term Investment Funds (“ELTIF Regulation“)

[5] Art. 13(1) of the ELTIF Regulation

[6] Art. 2(6) of the ELTIF Regulation

[7] Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on European Venture Capital Funds (“EuVECA Regulation“)

[8] Recital 1 of the EuVECA Regulation

[9] Art. 3(b) of the EuVECA Regulation

[10] The SME growth market is defined in Article 4(1)(12) of MiFID II

[11] Regulation (EU) No 346/2013 of the European Parliament and of the Council of 17 April 2013 on European Social Entrepreneurship Funds (“EuSEF Regulation“)

[12] Art. 3(b) of the EuSEF Regulation

[13] Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds (the “MMF Regulation”)

[14] Art. 2(1) of the MMF Regulation

[15] Art. 1(1) of the MMF Regulation[16] Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on cryptoassets markets and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937