AIFMD Q&A

The Central Bank of Ireland (CBI) has issued the 47th Edition of its AIFMD Q&A, revising ID 1145 (page 23) on whether RIAIFs or QIAIFs can invest in crypto-assets.
The CBI increased limits for indirect exposure to digital assets, allowing open-ended QIAIFs up to 20% of NAV and closed-ended or limited liquidity QIAIFs up to 50% of NAV. The pre-submission process for Qualifying Investor AIFs investing indirectly in digital assets or directly in digital assets has been updated. Pre-submissions should address risk management, liquidity, credit risk, market risk, operational risk, and legal and reputation risks for indirect exposure or provide details from the depositary for direct investments. Pre-submissions should be sent to fundsauthorisation@centralbank.ie. Details of what is required as part of the pre-submission is set out here.
Furthermore, compared to the 46th Edition the ID 1145 talks now about „digital assets“ instead of „crypto assets“, which read as follows – as quoted:
Q. ID 1145 – „Can a RIAIF or a QIAIF invest either directly or indirectly in digital assets?“
A: „Digital assets are assets that exist in digital form and attach ownership rights that depend primarily on cryptography and distributed ledger or similar technology. The nature and characteristics of digital-assets vary considerably. For example, digital-assets that are tokenised traditional assets (whose value is linked to an underlying traditional asset or a pool of traditional assets (such as financial instruments or commodities)) may have a different risk profile when compared to other digital-assets that are based on an intangible or non-traditional underlying. For the purposes of this Q&A “digital-asset” is used to refer to the latter type of digital-asset.
The Central Bank considers that the most material risks associated with digital asset investment include liquidity, credit, market, custody, operational, exchange risk, money laundering, legal, reputational and cyber risk.
In considering a proposed investment in digital assets, an AIFM must understand (consistent with its obligations) the extent to which the risks noted above, as well as other relevant risks are material to the investment. An AIFM must ensure it has appropriate risk management processes and procedures in place to manage any such risk and disclose such risks clearly in offering documents.
The Central Bank will permit a QIAIF to invest indirectly in digital assets subject to the criteria below being met. Direct investment in digital assets is not permitted until such time as it is demonstrated to the Central Bank that a depositary can meet its obligations under AIFMD to provide custody or safe-keeping services to digital assets.
Where a QIAIF proposes to invest indirectly in digital assets the following requirements apply:
a) the AIFM must have an effective risk management policy to address all risks relevant to investment in digital assets. This must address, at a minimum, risk relating to liquidity ,credit, market, custody, operational, exchange risk, money laundering, legal, reputational and cyber risk;
b) the AIFM must carry out appropriate stress testing on the proposed investment in digital assets. The stress testing should be extreme yet plausible, reflecting asset price volatility of digital assets including the potential entire loss of value in the investment;
c) the AIFM must have an effective liquidity management policy in place which includes a sufficient suite of tools to enable the AIFM to manage liquidity events arising in the QIAIF;
d) the prospectus of the QIAIF must contain clear disclosure in relation to the nature of the proposed investment in digital assets and must contain a clear articulation of the risks associated with that investment;
e) the QIAIF should assess the overall construction of its portfolio to ensure that there is an alignment between the redemption profile, the level of investment in digital assets and the likelihood of illiquidity (both in normal and stressed conditions) in the types of digital assets invested in. In this regard
– i. where a QIAIF proposes to invest up to 20% of its net asset value in digital assets, the QIAIF may be structured as having open-ended liquidity provided that the portfolio as a whole is determined by the AIFM to be suitable for an investment fund providing open-ended liquidity;
– ii. where a QIAIF proposes to invest up to 50% of its net asset value in digital assets, the QIAIF must have either limited liquidity or be closed-ended.
Taking into account the specific risks attached to digital assets and the potential that retail investors may not be able to appropriately assess the risks of making an investment in a fund which gives such exposures, the Central Bank is highly unlikely to approve a RIAIF proposing any exposure (either direct or indirect) to digital assets.
The Central Bank’s approach in relation to digital assets in investment funds will be kept under review, continue to be informed by European regulatory discussions on the topic and may change should new information or developments emerge in the future.