After months of industry consultation, Australia's securities watchdog, the Australian Securities and Investments Commission (ASIC), has given the green light to long awaited spot exchange-traded funds (ETFs) in the world's two largest cryptocurrencies, Bitcoin and Ethereum.
- Australia's regulator has approved spot exchange-traded funds (ETFs) in the world's two largest cryptocurrencies, Bitcoin and Ethereum.
- ASIC has provided best-practice guidelines and requirements for Bitcoin ETF issuers, emphasizing the protection and storage of crypto assets.
- The crypto industry typically supports spot Bitcoin funds over futures-backed Bitcoin funds as they provide a higher level of accuracy, stability, and transparency.
- Australia's move to provide regulatory clarity for physically backed crypto ETFs sets a framework for other counties to follow.
The approval will allow Australian investors to gain direct exposure to the physical assets' price through funds that trade on the Australian Securities Exchange (ASX). It also cements Australia's intent toward digital innovation and opens the door for regulators in other jurisdictions to fast-track spot crypto ETFs as the asset class continues to gain momentum with investors.
ASIC last week released a set of best-practice guidelines and requirements that fund issuers must satisfy when offering Bitcoin ETFs, with the regulator placing a particular emphasis on the protection and storage of cryptocurrency assets. For instance, private keys—the equivalent of a master password—need to remain offline in cold storage and must meet "robust physical security practices." Additionally, fund issuers will be required to make multiple private key backups stored in separate geographic locations. They must also appoint a Bitcoin custodial expert who will be "required to ensure crypto-assets are held in safe and secure custody," according to the watchdog.
A private key is a sophisticated form of cryptography that allows a user to access their cryptocurrency. A private key is an integral aspect of Bitcoin and altcoins, and its security makeup helps to protect a user from theft and unauthorized access to funds.
"We recognize the interest in, and demand for, exchange-traded products (ETPs) and other investment products that hold crypto-assets in Australia. However, we are also aware of the real risk of harm to consumers and markets if these products are not developed and operated properly." ASIC wrote in a statement released last week, per Business Insider Australia.
Other requirements Bitcoin ETF issuers must meet include holding a minimum of $10 million Australian dollars ($7.38 million U.S. dollars) in net tangible assets and adhering to various pricing, disclosure, and risk-management obligations.
Spot ETFs Versus Futures ETFs
ASIC's approval of a spot-backed ETF comes just several weeks after the Securities and Exchange Commission (SEC) gave the nod to a futures-backed ProShares Trust, the ProShares Bitcoin Strategy ETF (BITO), in the United States. The crypto industry typically supports Bitcoin funds that hold the physical asset over those that track derivatives-based Bitcoin futures as they provide a higher level of accuracy, stability, and transparency.
Crypto purists argue that futures-backed ETFs don't reflect bitcoin's current spot value, given that futures contracts require two parties agreeing to buy or sell bitcoin at a predetermined price and date. As a result, premiums or discounts to the actual bitcoin price can occur.
Altcoin ETFs in Focus
Although ASIC at this stage has only given the green light to Bitcoin and Ethereum ETFs, fund managers see the move as a key stepping stone for the approval of funds holding smaller cryptocurrencies, known as altcoins. "This will represent a huge move forward as investors will finally be able to access Bitcoin through a cost-effective, liquid investment vehicle. As other digital assets mature, we expect the scope to broaden," Asia-Pacific chief executive at VanEck Arian Neiron told The Australian Financial Review.
As of November 2021, altcoins accounted for nearly 60% of the total cryptocurrency market, with more than 10,000 cryptocurrencies and counting.
While it remains unclear how many spot Bitcoin ETFs are awaiting ASIC approval, it is understood that BetaShares, VanEck, and Cosmos Asset Management have other crypto products in the pipeline.
Crypto Investing Finds Main Street in Australia
Australian investment managers are likely to continue bolstering their crypto offerings after the stellar launch earlier this week of the Crypto Innovators ETF (CRYP.AX), which recorded the highest inflows of any ETF in ASX history over the first hour of trade. The country also reaffirmed itself as a crypto-friendly jurisdiction, with the Commonwealth Bank of Australia (CMWAY) recently announcing that it plans to offer its 6.4 million customers the ability to buy, sell, and hold cryptocurrency directly through its app. Moreover, Australia's move to provide regulatory clarity for physically backed crypto ETFs sets a framework for other counties to follow should they choose.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.