Cryptocurrency Hedge Funds Brace for Scheduled EU Regulations

Published on 03 October 2017 by Cryptovest Staff

But just as enthusiasm booms, so a new bout of regulation looms for the sector. In just three months, European hedge funds will have to comply with Markets in Financial Instruments Directiv (MiFID 2) disclosure requirements. And while Switzerland does not belong to the European Union, the new rules will affect local financial companies. Currently, the country is harmonizing its laws to apply some of the requirements for MiFID. Some of the points include:

  • The publication of a prospectus: For any public offering of securities and of a Key Investor Document for complex financial products (with possible exceptions, e.g. for certain categories of investors);
  • Rules of conduct: Provide rules of conduct (e.g. as regards the provision of information to clients in relation to costs, risks and product characteristics) that are likely to be largely derived from the EU legislation (including clients’ segmentation for all financial products).

And while for now a lot of funds are circumventing EU regulations by being based in offshore countries, the new Swiss-based fund will be facing increased scrutiny. Hedge funds in Europe will also have to keep more detailed records of communication and report trading and transactions with greater transparency.

At the same time, even mainstream hedge funds are preparing for the upcoming MiFID 2 requirements by banding under financial service platforms. Startup costs for a hedge fund in Europe start at $500,000 and may rise as far as $2 million, according to Clayton Heijman, chief executive officer of Privium Fund Management, reported Bloomberg. A fund may have to add extra costs for training: $25,000 a year just for a manager to be up to speed on the MiFID II rules," added Heijman.

So European hedge funds are choosing the services of larger platforms that would help with reporting and compliance.

But the presence of regulation may not be a bad thing. Despite the involved rules, the Euro Area is a hothouse for cryptocurrency projects. Increased affluence and a common currency are making it easier to purchase Bitcoin and altcoins. And regulations may have a positive effect on the sector, as they slow down adoption and discourage projects that rush and fail, or attempt an outright fraud.

And while some hedge funds and investment firms see opportunity in the choppy seas of cryptocurrencies, others believe this is not a worthwhile investment class. This is what Julian Robertson, the legendary hedge fund manager, thinks of Bitcoin:

"I’ve never understood it and I don’t think I’m going to."

So while there are challenges to the world of cryptocurrencies, there are also lessons that organizations have managed to adapt. Currently, exchanges and trading platforms like BitPanda, Kraken, and eToro have managed to comply with regulations and to continue operation without a glitch.

Cryprocurrency investment vehicles are having a hard time gaining approval, while at the same time buying and holding remains open, but requires work on the side of users, as well as greater volatility and technical risk.