Digital assets in investment funds under the KAGB – which fund type may invest in what

Please note: this article reflects the legal situation as of February 2024. There may have been changes since then, for example as a result of MiCAR and the German Financial Market Digitalisation Act (FinmadiG).

How can investment funds under the German Investment Code (Kapitalanlagegesetzbuch, KAGB) invest in digital assets? The answer depends on two questions: which type of fund is involved, and which type of digital asset. This article gives investment management companies, investment managers and depositaries an overview.

Key points at a glance

• Special AIFs have the most room for manoeuvre: in principle, all five types of digital assets are eligible, in some cases subject to a case-by-case review or to investment limits.
• Retail AIFs could not invest directly in cryptocurrencies or crypto assets as at the date of the factsheet. Since the Future Financing Act (ZuFinG) of 15 December 2023, closed-ended retail AIFs may acquire crypto assets for investment purposes, up to 10% of the value of the AIF.
• UCITS may not acquire cryptocurrencies or crypto assets directly. Derivatives in the form of a 1:1 certificate are possible, as are crypto securities and security tokens subject to investment limits.
• Partners and valuation matter too: the investment management company must assess whether its partners are suitable, in particular the depositary. And it must be possible to determine the market value of the assets.

Which types of fund does the KAGB recognise?

The KAGB distinguishes between UCITS and alternative investment funds (AIFs). AIFs are divided into special AIFs for professional and semi-professional investors and retail AIFs, which are also open to retail investors. Each type of fund has its own rules on the assets it may invest in.

• UCITS (Sections 192–213 KAGB): Section 192 KAGB governs the assets in which a UCITS management company may invest. Only the assets listed in Sections 193–198 KAGB are permitted.
• Closed-ended domestic special AIFs (Sections 285 et seq. KAGB) may only invest in assets whose market value can be determined. How the market value is determined is governed by the German Investment Accounting and Valuation Ordinance (KARBV).
• General open-ended domestic special AIFs (Section 282 KAGB) may only invest in assets whose market value can be determined. Their composition must be consistent with the rules on the redemption of units or shares and liquid enough to allow the intended redemptions.
• Open-ended domestic special AIFs with fixed investment conditions (Section 284 KAGB): Section 282 KAGB and the rules on UCITS and open-ended retail AIFs apply to them, unless Section 284 provides otherwise. With the consent of the investors, the fund may, for example, deviate from the UCITS rules if it acquires only the assets exhaustively listed in Section 284(2) no. 2 KAGB and complies with the limits under Section 284(2) nos. 3 and 4.
• Hedge funds (Section 283 KAGB) are general open-ended domestic special AIFs whose investment conditions additionally provide for leverage on a substantial basis or short selling.
• Closed-ended domestic retail AIFs (Sections 261 et seq. KAGB) may only invest in the assets listed in Section 261(1) KAGB.
• Open-ended domestic retail AIFs (Sections 214 et seq. KAGB) may only invest in assets under Section 219 KAGB. For crypto-related assets, only the assets under Sections 193–198 KAGB are eligible: securities, money market instruments, bank deposits, units or shares in investment funds, derivatives and other investment instruments.

Which types of digital assets are there?

To assess whether a fund may invest, we distinguish five types of digital assets:

1. Cryptocurrencies acquired as such on the spot market, usually via crypto exchanges.
2. Derivatives whose underlying is a cryptocurrency or an index referring to a cryptocurrency.
3. Crypto assets within the meaning of Section 1(11) sentence 1 no. 10 of the German Banking Act (KWG), as amended in February 2024.
4. Crypto securities within the meaning of Section 4(3) of the German Electronic Securities Act (eWpG) (in German).
5. Security tokens that qualify as (token-based) securities sui generis within the meaning of Article 4(1)(44) MiFID II.

Read more about the distinction in our article Crypto security, cryptographic instrument or DLT financial instrument?

Which fund may invest in what?

The table shows which types of digital assets each type of fund can invest in. It follows the factsheet; footnote 8 has been updated to reflect the Future Financing Act, which has since entered into force.

What matters in practice?

Different requirements apply depending on the type of fund, which can restrict the investment options. Investment management companies must also assess whether their partners are suitable, in particular the depositary. In February 2024, anyone holding crypto assets in custody for the fund required a licence for the crypto custody business under Section 1(1a) sentence 2 no. 6 KWG (BaFin, in German).

1. Check the fund type and the investment conditions: is the digital asset eligible, and which investment limits apply?
2. Classify the digital asset legally: cryptocurrency, derivative, crypto asset, crypto security or security token.
3. Make sure that the market value can be determined.
4. Select and assess the depositary and the crypto custodian.
5. Amend the investment conditions and sales documents.

FAQ

May a UCITS invest in Bitcoin?
Not directly. A derivative in the form of a 1:1 certificate that refers directly to the cryptocurrency and meets further requirements is possible.

Which funds have the most room for manoeuvre?
Special AIFs and hedge funds. In principle, all five types of digital assets are eligible for them, in some cases subject to a case-by-case review, to the investment limits or to the consent of the investors.

May closed-ended retail AIFs invest in crypto assets?
Yes, since 15 December 2023, provided the market value can be determined, up to 10% of the value of the AIF.

Planning a fund with digital assets?

FinPlanet supports investment management companies and depositaries from the product idea and the selection of partners through to product implementation. Contact us at info@finplanet.eu.

Factsheet and further reading

We have summarised the overview of fund types and the table in a factsheet together with Eric Romba (Osborne Clarke). You can download it here as a PDF (in German) or via the "Download PDF" button below the article.

Osborne Clarke's articles provide further information (in German):

• Crypto-related assets as investment opportunities under the KAGB
• Part 2: Closed-ended and open-ended domestic retail AIFs
• Part 3: Other investment funds and UCITS

For legal questions, we will gladly put you in touch with Eric Romba and his team.