Summary
In April 2023[1], the Central Bank of Ireland (CBI) released new enhanced guidelines for Qualifying Investor Alternative Investment Funds (QIAIFs) intending to acquire a digital asset exposure. The guidelines were published in response to the growing interest and participation of QIAIFs in digital assets, such as cryptocurrencies and tokens. Our Asset Management team explains these new guidelines below.
The new guidance is intended to supplement the existing regulatory framework for QIAIFs and provide greater flexibility to invest in digital assets, while maintaining appropriate levels of investor protection. In addition, the guidance applies to QIAIFs that invest in digital assets indirectly and clarifies the obligations of fund management companies in relation to these investments.
Key updates
This update permits a QIAIF to have an indirect exposure to digital assets and outlines the underlying limits of the investment. The CBI does not yet permit direct investment in digital assets until the appropriate capabilities for safeguarding and custody is further developed; however, this is a positive step in the right direction for asset managers seeking to gain exposure to digital assets using a QIAIF structure.
Where QIAIFs intend to have digital asset exposures, the updated guidance sets out the requirements and obligations to which a fund needs to adhere:
- Risk Management Policies – the Alternative Investment Fund Manager (AIFM) is required to have an effective risk management policy which covers all relevant risks associated with investing in digital assets. This will include, but not limited to, liquidity risk, credit risk, market risk, custody risk, operational risk, exchange risk, money laundering/terrorist financing risk, legal, reputational and cyber risk.
- Stress Testing – it is expected that the AIFM carry out periodic stress testing on the digital assets which are intended to be invested in. It is important that these stresses are at the ‘extreme’ level of severity but also being considered plausible. The level of stress tested can include up to the complete loss of the investment.
- Liquidity Risk Management – the fund manager is expected to have an active, robust and effective liquidity management policy which would include specific tools to manage any potential liquidity events in the fund.
- Disclosures – the prospectus of the fund needs to include clear disclosure on the nature of the proposed digital asset investment and an articulation of the relevant risks of the specific investment.
- Portfolio Construction – appropriate consideration should be made when constructing the portfolio to determine an appropriate alignment of the characteristics of the fund (e.g. exposure in digital assets), expected redemption outline and the potential normal and stressed levels of liquidity in these assets.
a. Where a QIAIF is structured as having open-ended liquidity, it can gain an indirect exposure to digital assets of up to 20% of its Net Asset Value (NAV).
b. Where structured as closed-ended or open-ended with limited liquidity, it can gain an indirect exposure to digital assets of up to 50% of its NAV.
How KPMG can support you
KPMG has supported a range of firms in understanding of the regulatory landscape relating to digital assets. This new asset type represents the emergence of new technologies, opportunities and innovation in the broader market which many firms are exploring. There are digital asset opportunities for traditional financial services providers and new crypto-only service providers, as well as risks and challenges to be tackled by legislators and regulators.
KPMG’s Digital Assets team is connected to the wider KPMG international network and we can help you understand the regulatory requirements and incorporate them into your broader digital asset strategies – in particular we can support you with a range of services including:
- to explore the potential benefits brought about by cryptocurrencies and underlying technologies;
- to prepare for existing or upcoming regulatory, investment, audit, and tax requirements; and
- to gain CBI authorisation as a new entrant or as a traditional firm.
