One of the final pieces of the cryptocurrency ETF puzzle is deciding how the arrangements with custodians will work. To that end, the Australian Securities and Investments Commission (ASIC) is in the final stages of consultation to decide if a crypto ETF will be traded locally.
This year, ASIC is expected to finalise its market consultation on the potential for digital currency ETFs for the Australian market. While it is still in discussion with relevant stakeholders, a few more creases need to be ironed out.
However, earlier in the year, it was reported that the Aussie crypto ETF could launch on the ASX in 2021.
Issues Still to be Finalised
Custodianship is an issue. According to Caroline Bowler, CEO of digital currency exchange BTC Markets, “The trend is for ETFs to physically hold the underlying digital currencies they reference. This raises the question of how custody of these assets would be managed.”
As it stands, there isn’t a suitable onshore custodial solution. So that’s something that needs to be worked out with custodial providers.
Caroline Bowler, BTC Markets
The current lack of relevant regulation and standards for custodians and exchanges is casting a shadow of uncertainty. Standards still need to be set and a regulatory body chosen to ensure the protection of investors.
The composition of crypto ETFs and their benchmark reference are also issues to be considered before local crypto ETFs can be traded.
But as ASIC recently noted as part of its consultation on crypto-asset-based ETPs and other investment products, there is real risk of harm to consumers if these products are not developed and operated properly, given the unique features and risks associated with them.
Alex Vynokur, CEO, BetaShares
It remains to be decided which method of ETF will work the best for the market, considering the needs of investors and their security and safety. With many Australian millennials planning on retiring at 50 with the help of crypto and ETFs, it’s obvious that there is a demand.
Different Kinds of ETFs
Depending on which products investors prefer, both active and passively managed ETFs could be traded.
A passive ETF is an investment that replicates the performance of the asset it references, and the portfolio is updated regularly (generally quarterly) to reflect changes in the reference index – for instance, the S&P/ASX 200.
On the other hand, actively managed ETFs invest in assets that are bought and sold by a portfolio manager on a more dynamic basis, depending on the manager’s view of the market and investment thesis.
Another model might be for an ETF to hold not just digital currencies but also companies whose products are built on distributed ledger technology, digital currency exchanges, and other listed and unlisted firms that are exposed to blockchain through their operations. This could be similar to a basket investment like ‘FAANG’, where investors can invest in a basket of industry leaders.
To successfully launch a crypto ETF in Australia, an issuer will need to show evidence that the underlying crypto asset has robust liquidity, transparency and price discovery, which we believe will only apply to a small subset of crypto assets.
Alex Vynokur, BetaShares
ETFs Provide Safety for Investors
Some of the risks associated with investing in the digital asset class may be mitigated by accessing digital currencies through an ETF, traded through a highly regulated environment such as a national stock market.
Fund managers who seek to offer such investment products should be required to demonstrate a track record of risk management and organisational competency in managing retail investment products.
Alex Vynokur, BetaShares
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