The Central Bank of Ireland, which controls foreign funds with over €4 trillion in assets, warned on Tuesday that allowing funds aimed at non-professional investors to engage in cryptocurrencies is “very improbable” since they are “extremely dangerous and speculative.”
The comment, which appears in the regulator’s second annual Securities Risk Outlook Report, primarily concerns mutual funds known as Undertakings for Collective Investment in Transferable Securities (Ucits), which cater to retail investors and account for roughly three-quarters of Irish-domiciled funds.
According to the survey, whether Ucits and another type of fund called Alternative Investment Funds (Aifs), primarily aimed at professional investors, can invest in digital or crypto-related assets have increased in recent months.
While such assets may be eligible for wholesale or professional investors, the bank stated that it is “very unlikely to approve a Ucits or a retail investor Aif proposing any exposure to crypto-assets — either direct or indirect.” This is because small investors would find it difficult to estimate the risk involved, according to the report.
Despite a severe sell-off between May and July, Bitcoin, the most popular digital currency, more than doubled in value in the first 112 months of the year, reaching an all-time high of around $67,000 (€58,620). On the other hand, the digital currency dropped over 50% before beginning a new climb in late January.
The broader cryptocurrency market, which includes Ethereum and Dogecoin, was projected to be worth $3 trillion at its height last November.
“There are still a lot of questions around what the essence of a [cryptocurrency] is,” Patricia Dunne, the Central Bank’s director of securities and markets supervision, told The Irish Times. “Is it an asset? Is it a commodity? So, while those dynamics prevail, I do not see our position changing . . . Crypto-assets are still a hugely volatile and risky investment.”
According to the paper, the global financial markets “demonstrated resilience” in recent years with Covid-19 and Brexit, assisted by central banks injecting massive sums of money into the system during the pandemic.
Nonetheless, the Central Bank earlier revealed that Irish money market funds (MMFs) experienced 10% investor withdrawals in March 2020 as corporations and banks hurried to grab cash during the height of the Covid-19 global financial shock. As a result, investor needs were met by all of the funds.
The report said that “vulnerabilities remain as increasing levels of indebtedness, stretched asset values and risk-taking behaviour in a search for yield environment have become more prominent”.
In recent months, markets for stocks and bonds have become increasingly turbulent as investors worry about how quickly central banks would remove stimulus and raise interest rates to combat global inflation.
According to Ms Dunne, the Central Bank is focused on ensuring that investment funds carefully examine their future liquidity and ability to meet client withdrawal demands in the event of a financial catastrophe.
For example, if a fund is obliged to participate in a fire sale of assets to fund investor withdrawals, market volatility could be exacerbated.